Exogenous shock of demonetization on digital payments

Abstract

Demonetization is an economic policy in which a certain currency unit is no longer recognized or utilized as legal tender. In other words, when a new currency unit enters circulation, the old one loses its legal tender status. The Indian government had demonetized bank notes twice before, in 1946 and 1978, with the purpose of combatin tax fraud by "black money" retained outside the regular economic system in both cases. The pre-independence administration hoped that demonetization would punish Indian businessmen who had built billions serving the Allies during WWII. The government demonetized banknotes of 1000, 5000, and 10,000 rupees in 1978, once again in the hopes of reducing counterfeit and black money. Now, on November 8, 2016, the Indian government announced the demonetization of all Mahatma Gandhi series 500 and 1000 banknotes.