Do households care about cash? Exploring the heterogeneous effects of India's demonetization

Sudipto Karmakar and Abhinav Narayanan

No 2019/73, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: The recent demonetization exercise in India is a unique monetary experiment that made 86 percent of the total currency in circulation invalid. In a country where currency in circulation constitutes 12 percent of GDP, the policy turned out to be a purely exogenous macroeconomic shock that affected all agents of the economy. This paper documents the impact of this macroeconomic shock on one such systematically important agent of the economy: the household. By construction, the policy helped households with bank accounts in disposing of the demonetized cash. We use a new household-level data set to tease out the effects of this policy on households with no bank accounts. Our results show that the impact of demonetization on household income and expenditure has been transient with the major impact being seen in December-2016. There is significant heterogeneity in the impact across households in different asset classes. We also show evidence of recovery of household finances whereby households were able to smooth out consumption during the post-demonetization period. However, this recovery phase is associated with an increase in household borrowing from different sources, primarily for the purpose of consumption. In particular, informal borrowing (money lenders, shops) increased substantially during this period. Thus, the policy although transient in nature, contributed to the unintended consequence of increased leverge for households.

Keywords: Demonetization; Household finance; Leverage (search for similar items in EconPapers)
JEL-codes: E21 E51 G28 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (8)

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Journal Article: Do households care about cash? Exploring the heterogeneous effects of India's demonetization (2020)
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