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

Author

Listed:
  • Ayushi Bajaj

    (Monash University)

  • Nikhil Damodaran

    (O.P. Jindal Global University)

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 this liquidity shock was equivalent to 1% of total consumption. 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.

Suggested Citation

  • 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.
    • Handle: RePEc:mos:moswps:2021-15
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Money; Payments; Shadow economy; Demonetization; Monetary policy;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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