Currency Flow in an Economy: India’s Demonetarization Event

In a previous paper, we analyzed an economic event in 2016-17 of a sudden demonetarization of India, to test the empirical validity of the Chartalist school of monetary theory [1]. The Chartalist school had distinguished three kinds of money: Fiat, Commodity, and Managed Money. The demonetarization event provided empirical evidence for this currency distinction being significant and empirically valid, in the context of the nation of India. That sudden withdrawal of Fiat money immediately decreased the amount of Commodity money, creating an economic crisis in local Indian commerce. Managed Money (as bank accounts) was unable to fill the temporary gap in the supply of money, because a large portion of the Indian population did not have bank accounts. Also the government had not supplied a sufficient num-ber of new Fiat money (new 500 and 2000 rupee notes) to quickly replace the withdrawn 500 and 1000 rupee notes. Our analysis showed that the policy thinking behind the demonetarization event lacked a proper understanding of valid monetary theory. In this paper, we continue the analysis of the demonetarization event by constructing a model of monetary flow in India. This model builds upon the Chartalist theory of money and may help fiscal policy makers to make sound decisions about currency and credit in a nation.

DOI: 10.4236/tel.2018.83033 477 Theoretical Economics Letters public sector (including all levels of government) and the private sector (including households and firms)" [2]. Wray also proposed to use an "accounting balance-sheet" approach between public and private sectors of a national economy [2].
The flow of "fiat money" in a national economy can flow between public and private sectors. And Wray's accounting model for a two-sector economy (private and public) is that fiat money is issued by the government for the function of collecting taxes. Issued fiat money enters the private sector from government spending (purchasing something from the private sector); and returns to the government sector by taxes on the private sector. To trace currency flows between public and private sectors, we construct a system-graphic model of a Price of this government credit to commercial banks is controlled by the discount rate offered by the central bank.
In accordance with Chartalist monetary theory, money goes from the private sector into the public sector as taxes paid in fiat money. In contrast, money goes from the public into the private sector as 1) government purchases using fiat money and 2) as government credit in the form of managed money in central bank providing credit to commercial banks (at the "discount window" of the  , this model distinguishes money between the public and private sectors as both printed currency (fiat money) and managed money (credit). Wray emphasized that these two forms of money, between the two sectors, enable the government to increase or decrease money in the economy through the control of the price of bank credit, without having to print or withdraw fiat money from the private sector [2].
Also in the private sector when companies provide employment to households, currency flows as fiat money and as managed money between companies and households. Money also flows between commercial banks and companies and households in the form of credit. Households and companies also interact monetarily with commodity markets in the form of production and consumption of commodity goods (often paid by payment services as Managed money). Money flows in consumption and production by enabled trade in the currency form of commodity money. Commodity money is composed of both fiat money (printed currency) and managed money (bank and payment services accounts). Fiat money is 'good' commodity money; while inflated fiat money is 'bad' commodity money.
To provide equity for companies and savings for households, both companies and households monetarily interact with financial market. Investment banks create and maintain financial markets through financial products, often financed with credit from commercial to investment banks (as managed money).

Currency Flow in the Demonetarization Event of India 2016-17
In a previous paper, we analyzed the Indian demonetarization event for institu-     The source of the data is from the RBI website [8]. serve money component to reach its pre-demonetization level since the major component is currency in circulation. This even impacted the liquidity in the economy, which is one major factor for economic growth.

Summary
Although this graphic analysis was informed by the empirical example of the Indian Demonetarization Event, the model is general. Its graphic form can help explain other empirical events in monetary policy and in other nations.