The Supply-Side Effects of India’s Demonetization

37 Pages Posted: 30 Oct 2019 Last revised: 23 Jun 2020

See all articles by Giri Subramaniam

Giri Subramaniam

Boston College - Department of Economics

Date Written: January 6, 2020

Abstract

I study the supply-side effects of a unique monetary shock – the 2016 Indian demonetization – that made 86% of currency in circulation illegal overnight. Exploiting cross-sectional variation in firm and industry characteristics that correlate with cash usage and exposure to the informal sector, I find that firms that use cash more and obtain larger shares of labor or material inputs from the informal sector, experienced declines in their labor and material shares after demonetization. I also show that casual laborers were more likely to report being unemployed in the months following demonetization. These findings document a supply channel for demonetization and also show that cash plays an essential role in India’s informal sector. Crucially, given that India’s formal sector is highly dependent on the informal sector for labor and materials, any shock to the supply of cash is likely to have affected the economy as a whole.

Keywords: Cash, Demonetization, Money Supply, Informal Employment, Informal Sector

JEL Classification: D22, E2, E42, E5, E51, O17

Suggested Citation

Subramaniam, Giri, The Supply-Side Effects of India’s Demonetization (January 6, 2020). Available at SSRN: https://ssrn.com/abstract=3472758 or http://dx.doi.org/10.2139/ssrn.3472758

Giri Subramaniam (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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