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Demand for cash: an econometric model of currency demand in India

Anirudh Tagat () and Pushpa L. Trivedi

Macroeconomics and Finance in Emerging Market Economies, 2020, vol. 13, issue 2, 205-222

Abstract: In 2016, two high-value currency notes were withdrawn from circulation in India (popularly known as the ‘demonetization’ policy). Data from the Reserve Bank of India shows that currency in circulation has not only returned to pre-demonetization levels but has exceeded it. Despite the recent increase in use of non-cash substitutes, cash usage in India persists. We present new evidence on the association between the shadow economy, informality, and currency in circulation using annual data between 1970 and 2016. We find that high-value currency in circulation is inelastic to growth of alternate payment instruments. Implications for currency management policies are discussed.

Date: 2020
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DOI: 10.1080/17520843.2020.1722193

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