  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.
