TITLE:
Modeling Currency Flow in an Economy: The Case of India’s Demonetization in 2016
AUTHORS:
Frederick Betz, Timothy R. Anderson, Aurobindh Kalathil Puthanpura
KEYWORDS:
Economics, Financial Systems, Monetary Theory, Methodology
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.4,
June
22,
2017
ABSTRACT: The 2016-2017 economic event of a sudden demonetization
in India can provide an empirical example in which to test the validity of some
schools of monetary theory, particularly the Chartalist School. The Chartalist School
distinguished three kinds of money: Fiat, Commodity, and Managed Money. The
event provided empirical evidence that this distinction between currencies in
an economy is valid and important. The 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 did not supply a
sufficient number of new 500 and 2000 rupee notes to quickly replace the withdrawn
500 and 1000 rupee notes.