School of Economics | Demonetisation affects
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Demonetisation affects

Demonetisation affects the economy through three different channels. It is potentially:

  • An aggregate demand shock because it reduces the supply of money and affects private wealth, especially of those holding unaccounted money;
  • An aggregate supply shock to the extent that economic activity relies on cash as an input (for example, agricultural production might be affected since sowing requires the use of labour traditionally paid in cash); and
  • An uncertainty shock because economic agents face imponderables related to the magnitude and duration of the cash shortage and the policy responses (perhaps causing consumers to deferor reduce discretionary consumption and firms to scale back investments)
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