Trade and Development Review, Vol 11 (2018)

Macroeconomics of Demonetisation: A short period equilibrium

Moumita Basu, Rilina Basu (Banerjee), Ranjanendra Narayan Nag

Abstract


The effects of demonetization in India have been a widely discussed and debated issue ever since 8th November, 2016. This paper wishes to add to that debate by focusing on a proper theoretical understanding of demonetization. In doing so, we construct a couple of models based on the Keynesian-Kaleckian framework. Both these models are based on interest rate targeting which makes money supply endogenous. The first model is an open economy AD-AS model while the second is a dual economy structuralist macro model. Both the models show how demonetisation can produce adverse macroeconomic outcomes.

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