Waknis, Parag (2019): Demonetization as a Payments System Shock under Goods and Financial Market Segmentation: A Short Run Analysis.
|
PDF
MPRA_paper_94171.pdf Download (1MB) |
Abstract
A surprise demonetization, where certain or all denominations of currency notes cease to be legal tender on a short notice, can be understood as a severe payment system shock requiring agents to immediately shift to alternative payment mechanisms. I use a short-term macroeconomic model based on Willamson (2009) featuring goods and financial market segmentation to analyze the effect of such a shock in an economy with substantial informality and cash dependence. The quantitative characterization of the equilibrium dynamics using a deterministic example shows significant level as well as redistributive effects in the very short run. The households with access to formal financial markets experience an increase in consumption and those without such access experience a decline. Most of these effects come from differential access to formal financial markets as a consumption smoothing mechanism.
| Item Type: | MPRA Paper |
|---|---|
| Original Title: | Demonetization as a Payments System Shock under Goods and Financial Market Segmentation: A Short Run Analysis |
| Language: | English |
| Keywords: | demonetization, segmented markets, payments systems |
| Subjects: | E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E26 - Informal Economy ; Underground Economy E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy |
| Item ID: | 94171 |
| Depositing User: | Dr. Parag Waknis |
| Date Deposited: | 30 May 2019 11:08 |
| Last Modified: | 28 Sep 2019 16:51 |
| References: | Bajaj, A. and N. Damodaran (2018). Digitization and demonetization in a shadow economy model. Technical report. Batini, N., Y.-B. Kim, P. Levine, and E. Lotti (2011, November). Informal Labour and Credit Markets: A Survey. Working Papers 11/94, National Institute of Public Finance and Policy. Chodorow-Reich, G., G. Gopinath, P. Mishra, and A. Narayanan (2018, December). Cash and the economy: Evidence from india’s demonetization. Working Paper 25370, Na- tional Bureau of Economic Research. Freeman, S. (1996, December). The Payments System, Liquidity, and Rediscounting. American Economic Review 86(5), 1126–1138. Ghani, S. E., W. R. Kerr, and A. Segura (2015, March). Informal tradables and the employ- ment growth of Indian manufacturing. Policy Research Working Paper Series 7206, The World Bank. Gomis-Porqueras, P., A. Peralta-Alva, and C. Waller (2014). The shadow economy as an equilibrium outcome. Journal of Economic Dynamics and Control 41(C), 1–19. Grossman, S. and L. Weiss (1983, December). A Transactions-Based Model of the Mone tary Transmission Mechanism. American Economic Review 73(5), 871–880. Lagos, R. and R. Wright (2005, June). A Unified Framework for Monetary Theory and Policy Analysis. Journal of Political Economy 113(3), 463–484. Lucas, R. J. (1990, April). Liquidity and interest rates. Journal of Economic Theory 50(2), 237–264. Nosal, E. and G. Rocheteau (2006). The economics of payments. Policy Discussion Papers (Feb). Rai, S. (2016, December). The demonetisation decision: Event, impact, narrative and meaning. Ramakumar, R. (Ed.) (2017). Note Bandi: India’s Elusive Chase for Black Money. Oxford University Press. Rotemberg, J. J. (1984, February). A Monetary Equilibrium Model with Transactions Costs. Journal of Political Economy 92(1), 40–58. Temzelides, T. and S. D. Williamson (2001, July). Payments Systems Design in Determin- istic and Private Information Environments. Journal of Economic Theory 99(1-2), 297–326. Waknis, P. (2017, March). Demonetisation through segmented markets: Some theoretical perspectives. Economic & Political Weekly 52(9). Williamson, S. D. (2003, March). Payments systems and monetary policy. Journal of Mon- etary Economics 50(2), 475–495. Williamson, S. D. (2008, September). Monetary policy and distribution. Journal of Monetary Economics 55(6), 1038–1053. Williamson, S. D. (2009, April). Transactions, Credit, and Central Banking in a Model of Segmented Markets. Review of Economic Dynamics 12(2), 344–362. |
| URI: | https://mpra.ub.uni-muenchen.de/id/eprint/94171 |
All papers reproduced by permission. Reproduction and distribution subject to the approval of the copyright owners.
| View Item |