Inflation and Disintermediation

95 Pages Posted: 17 Jun 2019 Last revised: 25 May 2021

See all articles by Isha Agarwal

Isha Agarwal

University of British Columbia

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: May 25, 2021

Abstract

In a 47-country panel, large inflation increases tend to be followed by aggregate lending contractions, driven by banks with balance sheets most negatively exposed to inflation. We explore how rising inflation affects the macroeconomy through a banking channel by studying an unexpected U.S. inflation increase in early 1977. Our identification strategy exploits differences in reserve requirements across states for Fed nonmember banks, leading banks to be differentially exposed to unexpected inflation increases. More exposed banks cut lending, reducing local house prices and construction employment. Our results suggest an important consequence of inflation is its impairment of the banking sector.

Keywords: inflation, monetary economics, banking, bank credit channel

JEL Classification: E31, E34, G21

Suggested Citation

Agarwal, Isha and Baron, Matthew, Inflation and Disintermediation (May 25, 2021). Available at SSRN: https://ssrn.com/abstract=3399553 or http://dx.doi.org/10.2139/ssrn.3399553

Isha Agarwal

University of British Columbia ( email )

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869, Henry Angus Building
Vancouver, NY V6T1Z2
Canada

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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