Consumer payment choice and the heterogeneous impact of India's demonetization

Ayushi Bajaj, Nikhil Damodaran

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Consumer payment choice is based on heterogeneous preferences, availability, usage costs, and effective taxes. We examine the consequences of this choice on consumption distribution, aggregate output, welfare and the shadow economy. We analyze India's sudden demonetization of 86% of the cash in circulation with new notes gradually being replaced over the next several months. The welfare cost of the liquidity shock was equivalent to 1% of consumption owing to the slow remonetization process. Even though all consumers experienced a decline in welfare, its extent varied depending on the degree of cash dependence and the ability to switch to non-cash payments. The middle consumption deciles were disproportionately affected.

Original languageEnglish
Article number104329
Number of pages19
JournalJournal of Economic Dynamics and Control
Volume137
DOIs
Publication statusPublished - Apr 2022

Keywords

  • Demonetization
  • Monetary policy
  • Money
  • Payments
  • Shadow economy

Cite this