Impact of inflation on firms’ balance sheets
In this paper, Brunnermeier et al. study how inflation is transmitted to the real economy through firms’ balance sheets. They construct a new firm-level database by digitizing a financial manual with firm-level information on balance sheets, income statements, employment, and outstanding bonds for about 700 joint-stock firms in Germany from 1919 to 1923. They supplement these data with a range of other newly digitized datasets, including data on bankruptcies, retail prices, and wages. Using time-series variation they find:
- Bankruptcies consistently declined with rising inflation and remained at historically low levels even with the economic turmoil of 1923 because inflation was associated with a massive fall in financial leverage.
- High-leverage firms saw larger increases in employment, book equity, and market equity valuations during the inflation period. These firms also saw larger declines in the share of interest expenses along with an increase in production expenses.
The Debt-Inflation Channel of the German Hyperinflation
Authors: Markus K. Brunnermeier, Sergio Correia, Stephan Luck, Emil Verner, Tom Zimmermann
From: Princeton University, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, MIT, University of Cologne
Inflation uncertainty at the firm level
In this paper, Yotzov et al. construct a new measure of own-price inflation uncertainty at the firm level using a large and representative survey of CFOs in UK businesses, namely the Decision Maker Panel (DMP) survey. They find that own-price forecast errors and inflation uncertainty are negatively correlated with firm profit margins and productivity:
Inflation uncertainty increased significantly from the start of 2021 and reached a peak in the second half of 2022, even as a similar measure of sales uncertainty declined. We also find large cross-sectional differences in inflation uncertainty, with uncertainty particularly elevated for smaller firms and those in the goods sector. Finally, we show that firms that are more uncertain about their own price expectations experience higher forecast errors 12 months later.
Firm Inflation Uncertainty
Authors: Ivan Yotzov, Lena Anayi, Nicholas Bloom, Philip Bunn, Paul Mizen, Özgen Öztürk, and Gregory Thwaites
From: Bank of England, Stanford University, University of Nottingham, European University Institute
