Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization

Ayushi Bajaj () and Nikhil Damodaran ()
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Ayushi Bajaj: Monash University
Nikhil Damodaran: O.P. Jindal Global University

No 2021-15, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: Consumer payment choice is based on heterogeneous preferences, availability, usage costs, and effective taxes. We examine the consequences of this choice on consumption distribution, aggregate output, welfare and the shadow economy. We analyze India’s sudden demonetization of 86% of the cash in circulation with new notes gradually being replaced over the next several months. The welfare cost of this liquidity shock was equivalent to 1% of total consumption. Even though all consumers experienced a decline in welfare, its extent varied depending on the degree of cash dependence and the ability to switch to non-cash payments. The middle consumption deciles were disproportionately affected.

Keywords: Money; Payments; Shadow economy; Demonetization; Monetary policy (search for similar items in EconPapers)
JEL-codes: D83 E41 E52 E58 O17 (search for similar items in EconPapers)
Date: 2021-10
New Economics Papers: this item is included in nep-dcm, nep-mac, nep-mon and nep-pay
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