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

Bajaj, Ayushi and Damodaran, Nikhil (2022) Consumer payment choice and the heterogeneous impact of India’s demonetization. Journal of Economic Dynamics and Control, 137: 104329. ISSN 0165-1889

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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.

Item Type: Article
Keywords: Money | Payments | Shadow economy | Demonetization | Monetary policy
Subjects: Social Sciences and humanities > Economics, Econometrics and Finance > Econometrics
Social Sciences and humanities > Economics, Econometrics and Finance > Economics
Physical, Life and Health Sciences > Mathematics
JGU School/Centre: Jindal School of Government and Public Policy
Depositing User: Shilpi Rana
Date Deposited: 15 Feb 2022 04:21
Last Modified: 21 Jun 2022 09:14
Official URL:
Additional Information: We thank Guillaume Rocheteau, Pedro Gomis-Porqueras, Pushkar Maitra, Almuth Scholl, Mohammed Ait Lahcen, Randall Wright, Anirudh Tagat, Nikita Naik and discussants Makoto Watanabe and Raghbendra Jha for helpful discussions on earlier versions. We also thank participants at the Bank of Finland; Midwest Macro Workshop, Wisconsin; 5th HenU/INFER Macro Workshop, China; Deakin University, Monash University, University of Queensland; Summer School in Development Economics, Italy; Australasian Economic Theory Workshop; Ashoka University, Delhi School of Economics and IIM-Ranchi for useful comments and suggestions


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