Payment-System Development and the Real Economy: Implications from India’s Demonetization

46 Pages Posted: 23 May 2018

See all articles by Xiaodan Gao

Xiaodan Gao

National University of Singapore

Mingzhi Wang

University of International Business and Economics (UIBE)

Na Zhang

Fudan University - Department of Finance

Date Written: May 10, 2018

Abstract

With cashless transactions gaining momentum in developing countries, understanding the impacts of payment-system development on the real economy becomes essential. In this paper, we exploit India's demonetization shock to estimate the degree of payment-system development in India and rely on a structural model to identify the impacts of payment systems on supporting short-run economic stability and long-run economic development in emerging economies. We find that payment systems stabilize the real economy and absorb adverse shocks in the short run. However, payment-system development does not always translate into long-run economic growth. Instead, the effect relies on the cash-consumption relation in the economy. In particular, in the case of a complementary (substitutional) cash-consumption relationship, payment-system development reduces (increases) real output and impedes (promotes) economic growth.

Keywords: Demonetization, Payment Systems, Economic Growth, Money Demand

JEL Classification: O11, E42, G28, E41

Suggested Citation

Gao, Xiaodan and Wang, Mingzhi and Zhang, Na, Payment-System Development and the Real Economy: Implications from India’s Demonetization (May 10, 2018). Available at SSRN: https://ssrn.com/abstract=3176366 or http://dx.doi.org/10.2139/ssrn.3176366

Xiaodan Gao (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Mochtar Riady Building, #6-50
Singapore, Singapore 119245
Singapore
(+65)66013543 (Phone)
(+65)67795059 (Fax)

Mingzhi Wang

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Na Zhang

Fudan University - Department of Finance ( email )

Shanghai, 200433
China

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