TITLE:
Currency Flow in an Economy: India’s Demonetarization Event
AUTHORS:
Frederick Betz, Timothy R. Anderson, Aurobindh Kalathil Puthanpura
KEYWORDS:
Economics, Monetary Theory, Fiscal Policy
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.3,
February
14,
2018
ABSTRACT: 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. 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
number 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withdrawn 500 and 1000 rupee notes.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.