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Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization

Ayushi Bajaj and Nikhil Damodaran

No 07-20, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: Consumer payment choice is based on heterogeneous preferences, availability, usage costs, and effective taxes. We examine the consequences of this choice on consump-tion distribution, aggregate output, welfare and the shadow economy. We employ this framework to analyze India’s unexpected demonetization of 86% of its currency in circulation. We find that this shock to liquidity led to an immediate and temporary fall in aggregate output and welfare. Further, it led to disparate distributional effects as not all consumers could switch to non-cash payments. Using consumption distribu-tion data, we find the lower and middle deciles in rural areas were disproportionately affected.

JEL-codes: D83 E41 E52 E58 O17 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2020-12
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pay
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