Author(s):
Sagar Wadhwa
No Affiliation Provided
Published:
Working Paper
Citation(s):
Citation(s) not specified
JEL Code(s):
JEL code(s) not specified.

In November 2016, the Government of India made the two highest denomination currency notes invalid overnight. While this move was proposed for potential future benefits, it resulted in severe liquidity con- straints for many households as these two notes constituted 86% of the total currency in circulation. In this paper, I study the impact of resulting liquidity constraints on household consumption using Consumer Pyramids panel data. I find that demonetization led to a decline in household durable and non-durable con- sumption in the initial months after demonetization. The decline was relatively higher for richer households. I also find that households increased borrowing after demonetization, particularly from money lenders. The increase in borrowing was relatively higher for poorer households. Focusing on heterogeneity among farmers, I show that the use of credit was higher for those households who rely more on cash. The results suggest that while richer households reduced their consumption because it came at a lower utility cost to them, poorer households had to rely on informal credit to maintain their consumption.

CMIE Products Files
Specifications Programs
Consumer Pyramidsdx

Use of CMIE Product implies acceptance of the usage agreement & privacy policy   ♦   FAQs   ♦  Diagnosis