Consumer Demand Shocks & Firm Linkages: Evidence from Demonetization in India
73 Pages Posted: 7 Oct 2020 Last revised: 3 Jun 2021
Date Written: August 26, 2020
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
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