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

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  • Anirudh Tagat
  • Pushpa L. Trivedi

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In 2016, two high-value currency notes were withdrawn from circulation in India (popularly known as the ‘demonetization’ policy).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.

Suggested Citation

  • Anirudh Tagat & Pushpa L. Trivedi, 2020. "Demand for cash: an econometric model of currency demand in India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 13(2), pages 205-222, May.
    • Handle: RePEc:taf:macfem:v:13:y:2020:i:2:p:205-222
    DOI: 10.1080/17520843.2020.1722193
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    Cited by:

    1. Jacek Pietrucha & Grzegorz Maciejewski, 2020. "Precautionary Demand for Cash and Perceived Risk of Electronic Payments," Sustainability, MDPI, vol. 12(19), pages 1-25, September.
    2. Ayushi Bajaj & Nikhil Damodaran, 2021. "Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization," Monash Economics Working Papers 2021-15, Monash University, Department of Economics.
    3. Hakan Yilmazkuday & M. Ege Yazgan, 2009. "Effects of credit and debit cards on the currency demand," Applied Economics, Taylor & Francis Journals, vol. 41(17), pages 2115-2123.
    4. Ayushi Bajaj & Nikhil Damodaran, 2020. "Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization," Monash Economics Working Papers 07-20, Monash University, Department of Economics.
    5. Bajaj, Ayushi & Damodaran, Nikhil, 2022. "Consumer payment choice and the heterogeneous impact of India’s demonetization," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).

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