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An Empirical Insight of Examining Impact of Recent Demonetization on Monetary System: Evidence from India

Author

Listed:
  • Narayan Sethi

    (Department of Humanities and Social Sciences, National Institute of Technology (NIT) Rourkela, Odisha, India.)

  • Padmaja Bhujabal

    (Department of Humanities and Social Sciences, National Institute of Technology (NIT) Rourkela, Odisha, India.)

  • Devi Prasad Dash

    (Department of Humanities and Social Sciences, Indian Institute of Technology (IIT), Ropar, Punjab, India.)

  • Sanhita Sucharita

    (Centre for Humanities and Social Sciences, School of Humanities and Social Sciences, Central University of Jharkhand, Ranchi, Jharkhand, India.)

Abstract

Demonetization initiative by Govt. of India in Nov-Dec, 2016 aimed at addressing the issues like black money, hoarding and overall cleansing the monetary system. This paper in this regard attempts to empirically examine the impact of demonetization drive upon the monetary system by taking data of 180 days prior to Nov, 2016. The cointegration results exhibit show a long run cointegration between the money supply, demonetization dummy, cash in hand, notes in circulation and bank deposits. Furthermore, our Bayer-Hanck cointegration also confirms the cointegration among the variables. Our error correction mechanism analysis shows the long run relation between the variables. The variance decomposition analysis further states that effect of demonetization is widely visible upon the cash in hand followed by the notes in circulation. Despite the wider claims by the government regarding the positive impacts of demonetization drive, this initiative is fraught with several challenges and limitations. The implications of this initiative are discussed in this paper.

Suggested Citation

  • Narayan Sethi & Padmaja Bhujabal & Devi Prasad Dash & Sanhita Sucharita, 2018. "An Empirical Insight of Examining Impact of Recent Demonetization on Monetary System: Evidence from India," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(4), pages 1065-1092, Autumn.
    • Handle: RePEc:eut:journl:v:22:y:2018:i:4:p:1065
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