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Felix speaks about his research on the German Hyperinflation
Felix von Meyerinck is a senior researcher at our Department of Finance and an affiliated researcher at the Hamburg Financial Research Center. He holds a PhD in Finance from the University of Hamburg. After his PhD, he taught at the University of St.Gallen. He held visiting positions at the Department of Finance at NYU Stern and Tilburg University. His research focuses on corporate finance and household finance.
History provides a unique and valuable laboratory for answering fundamental questions in finance and economics. As researchers, we often rely on contemporary data to analyze pressing questions, but historical settings can sometimes provide even deeper insights. I like to illustrate this with a quote attributed to Mark Twain: "History does not repeat itself, but it often rhymes." The key idea is that while specific details, circumstances, and actors change over time, the core patterns of economic events tend to recur. We frequently underestimate how much history can teach us about modern issues.
In my recent research, I use the German hyperinflation of the 1920s to explore how inflation influences financial decision-making and how inflation shocks shape individuals' expectations about future inflation. This time period is pretty unique, which makes it a worthwhile setting to improve our understanding of how inflation affects how individuals make economic decisions.
In 2017, we asked ourselves how the investment behavior of households responds to inflation. At the time, all we knew about how investors respond to inflation came from papers that looked at returns of securities, which represent only a measure of aggregate investor behavior. Instead, we set out to analyze the trades of individual investors, as is typical in the household finance literature. However, in 2017, recent periods for which trade data was available were characterized by very low inflation, which meant that inflation was not a major concern for investors. This lack of inflation made it difficult to study how investors respond to inflationary pressure, so we turned to a historical setting where inflation played a significant role in shaping financial behavior, leading us to examine one of the most turbulent periods in financial history — the German hyperinflation of the early 1920s.
We manually collected almost 50,000 trades from around 2,000 individual investors from a German bank and studied their trading behavior. For German investors during this turbulent period, stocks were the best and most accessible hedge against inflation. However, our findings suggest that many investors suffered from “money illusion” and made suboptimal financial decisions — such as avoiding stocks when inflation was high — even though stocks provided some protection against inflation.
We began disseminating our paper in late 2020, shortly before inflation rates returned to levels unseen for quite some time and interest in inflation surged. Our research gained significant attention as policymakers, academics, and investors were eager to understand historical parallels and potential insights into contemporary inflation dynamics.
We now see new papers emerging, following our approach of utilizing trade-level data to better understand how investors’ trading behavior responds to inflation. Our paper, which was published in the Review of Financial Studies, illustrates how the past can be leveraged to answer economic questions with high relevance today, particularly in understanding investor responses to inflationary environments.
The period of the German hyperinflation remains ever-present in Germany and is often cited as a key influence on how Germans perceive inflation today. When we began researching this period, I was surprised to discover large collections of hyperinflation-era banknotes from different family members—carefully preserved for decades! The omnipresence of this historical period in Germany led us to empirically investigate whether inflation experiences can persist across generations.
In our new paper, we demonstrate that inflationary experiences can have a surprisingly persistent impact on people’s expectations and financial behavior. Individuals from areas that experienced more severe hyperinflation in the 1920s still expect higher inflation today. This effect is transmitted both vertically—through families—and horizontally—through collective memory and local institutions. Additionally, we find that people in these areas respond differently to inflation-related policies and adjust their financial decisions accordingly. For example, they tend to invest less in fixed-income securities, likely because they appear less attractive to them. These results suggest that inflation expectations are not just shaped by recent economic events but also by deep historical experiences.
Absolutely. For both projects, we collected much of the data manually, with a dedicated team of research assistants, just a few years ago. However, recent advances in machine learning (ML) and Optical Character Recognition (OCR) techniques have revolutionized the process, making it increasingly feasible to digitize historical records with minimal manual intervention. With continuous advancements in these technologies, I anticipate that research projects will leverage historical data on an unprecedented scale, unlocking insights that were previously considered impractical to explore.
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