Consumer Demand Shocks & Firm Linkages: Evidence from Demonetization in India

73 Pages Posted: 7 Oct 2020 Last revised: 3 Jun 2021

See all articles by Faizaan Kisat

Faizaan Kisat

Princeton University - Department of Economics

Minh Phan

Columbia University; Columbia University - Columbia Business School

Date Written: August 26, 2020

Abstract

This paper investigates whether a consumer demand shock propagates through industry input-output networks. In November 2016, India demonetized 86% of its currency, creating a nationwide demand shock. We construct upstreamness measures to evaluate the impact of demonetization on firms based on their network position. In contrast to current literature, we find that the shock does not propagate through the network. Declines in revenues, payroll, and investment are limited to consumer facing firms. We identify pricing power, inventory frictions, and export intensity as viable explanatory mechanisms. The presence of these frictions suggests that downstream firms are particularly vulnerable to demand shocks.

Keywords: Demand Shocks, Firm Networks, Supply Chain Frictions, Revenue, Profitability

JEL Classification: O11, E23, G30, E51

Suggested Citation

Kisat, Faizaan Teizoon and Phan, Minh and Phan, Minh, Consumer Demand Shocks & Firm Linkages: Evidence from Demonetization in India (August 26, 2020). Available at SSRN: https://ssrn.com/abstract=3698258 or http://dx.doi.org/10.2139/ssrn.3698258

Faizaan Teizoon Kisat

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Minh Phan (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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