Impact of the Indian “demonetization” policy on its export performance

Bidisha Lahiri and Anurag Deb ()
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Anurag Deb: Oklahoma State University

Empirical Economics, 2022, vol. 62, issue 6, No 7, 2799-2825

Abstract: Abstract We examine the export impact of the Indian government’s surprise move to invalidate 86% of existing currencies overnight. This ‘demonetization' was undertaken in an attempt to eliminate illegal and untaxed transactions, and to make the financial system more reliant on electronic transactions. This policy was implemented within a production structure that significantly depended on cash and informal credit sources, and a banking infrastructure that did not reach all corners of the economy. Due to the unexpectedness of this policy, the impact is predicted to have been stronger in the short run than the long run as the economy adjusted to the new system. The synthetic control method (SCM) achieves this, and with its ability to accommodate scenarios where the policy impact may vary across post-treatment periods, provides a suitable tool for our analysis. Additionally the unexpectedness of the policy circumvents anticipation issues making the scenario an ideal candidate for SCM analysis. No long-term improvements though significant short-term losses in exports values due to this policy are uncovered that are robust across alternate specifications and estimation methods.

Keywords: Exports; Currency invalidation; Synthetic control; Counterfactual (search for similar items in EconPapers)
JEL-codes: E02 E58 F14 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s00181-021-02126-z

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