The Political Impact of Monetary Shocks: Evidence from India's 2016 Demonetization

29 Pages Posted: 5 Jan 2018

See all articles by Rikhil R Bhavnani

Rikhil R Bhavnani

University of Wisconsin-Madison

Mark Copelovitch

University of Wisconsin-Madison

Date Written: January 1, 2018

Abstract

What are the political consequences of monetary shocks? While theories of retrospective voting suggest that voters should punish incumbents for negative economic shocks within incumbents' control, other works suggest voters' ability and willingness to do so are limited. We examine this issue by tracing the impact of the sudden demonetization of 86% of India's currency in 2016. We argue and show, using difference-in-difference and instrumental variables analyses, that the economic impact of demonetization was felt most acutely in relatively "unbanked" areas, where households and businesses lack access to the formal financial system and are most cash-dependent. Further, the BJP, the incumbent party that implemented demonetization, was penalized the least in relatively unbanked districts where people were economically hurt the most. We speculate why this might be the case. Our findings illustrate that monetary policy has important distributional consequences that shape voting.

Keywords: India, demonetization, political economy, monetary policy, voting, elections, shocks, political behavior

JEL Classification: E00, E5, G21

Suggested Citation

Bhavnani, Rikhil R and Copelovitch, Mark, The Political Impact of Monetary Shocks: Evidence from India's 2016 Demonetization (January 1, 2018). Available at SSRN: https://ssrn.com/abstract=3095228 or http://dx.doi.org/10.2139/ssrn.3095228

Rikhil R Bhavnani

University of Wisconsin-Madison ( email )

110 North Hall
1050 Bascom Mall
Madison, WI 53706-1481
United States

HOME PAGE: http://www.rikhilbhavnani.com

Mark Copelovitch (Contact Author)

University of Wisconsin-Madison ( email )

401 North Hall, 1050 Bascom Mall
Madison, WI 53706
United States

HOME PAGE: http://markcopelovitch.com

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