Consumer payment choice and the heterogeneous impact of India’s demonetization

Ayushi Bajaj and Nikhil Damodaran

Journal of Economic Dynamics and Control, 2022, vol. 137, issue C

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 the liquidity shock was equivalent to 1% of consumption owing to the slow remonetization process. 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: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000343

DOI: 10.1016/j.jedc.2022.104329

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