The Macroeconomics of Demonetization: Theory and Some Conjectures

Subhasankar Chattopadhyay

South Asian Journal of Macroeconomics and Public Finance, 2019, vol. 8, issue 2, 118-143

Abstract: The withdrawal of high-denomination paper money in India—popularly termed ‘demonetization’—has generated interest among common people to understand what the usual macroeconomic consequences of such one-time monetary shock are. This article conjectures (a) that such unanticipated supply-side replacement of paper money of higher denominations may lead to a currency ‘trap’ in the short run and a permanent increase in the hoarding of lower denomination currencies in the long run and (b) that the effect on the GDP in the medium run can be ambiguous in a simple IS-LM framework once the effects of variable price level and changing inflation expectations are captured through the presence of an informal sector. JEL Classification: E 12, E 26, E 44, E 52

Keywords: Demonetization; currency trap; informal sector (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:sae:smppub:v:8:y:2019:i:2:p:118-143

DOI: 10.1177/2277978719861212

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