The note ban affected India’s economic activity in the period after the amendment announced on November 8, 2016, but the impact disappeared in the summer of 2017, says National Bureau of Economic Research based in the US.
“Our results imply that demonetization has reduced the growth rate of economic activity by at least 2% points in the demonetization quarter,” according to a paper Cash and the Economy: Evidence from India’s Demonetization.
The document, which was not reviewed by the peers, indicates that economic activity in India fell by 3 percentage points or more in November and December 2016, although the effects have disappeared in some of these years. It also noted some of the potential enduring benefits of the measure, for example, 86% of outstanding bills were withdrawn.
The study used a “new household employment survey” and “satellite data on man-made night activities”, as well as a number of other databases to measure the effects of demonetization at the district level. In the first few months, note-ban affected almost all parts of India, even though with variable intensity, which also depends on how quickly degrees of substitution were obtained.
“If trend growth in India was 1.5% per quarter (6% per year), our estimates imply a complete reduction in economic activity of about 0.5% in the fourth quarter of 2016 compared to the earlier quarter,” he added. According to a note, “This stems from the 3% decline in November and December and the lack of impact in the month of October before the demonetization.”
The authors also clarified that discontinuation of currency according to their model consisted in forcing the conversion of money into less liquid bank deposits, which, in the existence of declining wage firmness, which led to a decline in demonetization, employment, and production.