The Debt-Inflation Channel of the German (Hyper-)Inflation

TL;DR

This paper investigates how the German hyperinflation of 1919-1923 transmitted to the real economy through firm balance sheets, revealing significant debt reduction and employment effects.

Contribution

It provides new micro- and macro-level evidence of the debt-inflation channel during hyperinflation using digitized historical data.

Findings

Inflation caused large reductions in real debt burdens.

Firms with higher initial liabilities saw greater interest expense declines.

Higher employment was observed among firms with more nominal liabilities.

Abstract

This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible.