Implications of Bank Equity Price Declines for Inflation

This Economic Commentary examines the relationship between bank equity price index returns and inflation in advanced economies. While large declines in bank equity price indices are generally followed by declines in the ratio of bank credit to GDP, a measure of credit supply, and economic activity as measured by GDP, they have essentially no effect on inflation. These findings suggest that the collapse of several regional banks in early 2023 would not, on its own, put downward pressure on inflation.
The aftermath of the collapse of several regional banks, including Silicon Valley Bank and Signature Bank, in early 2023 raised important questions regarding the effects that banking distress would have [...]