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Inflation and Disintermediation

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  • Agarwal, Isha
  • Baron, Matthew

Abstract

We test a bank credit channel through which unexpected increases in inflation lead to short-run macroeconomic fluctuations. For identification, we study an unexpected U.S. inflation increase in early 1977 and exploit differences in state-level reserve requirements for Federal Reserve nonmember banks, which create differences in banks’ inflation exposures. More exposed banks reduce lending, lowering local house prices and construction employment. We provide evidence for potential mechanisms, including a bank net wealth and a loan misallocation channel. Our results suggest that an important consequence of inflation is its impairment of the banking sector.

Suggested Citation

  • Agarwal, Isha & Baron, Matthew, 2024. "Inflation and Disintermediation," Journal of Financial Economics, Elsevier, vol. 160(C).
    • Handle: RePEc:eee:jfinec:v:160:y:2024:i:c:s0304405x24001259
    DOI: 10.1016/j.jfineco.2024.103902
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Banking; Bank lending;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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