In the backdrop of the demonetization
move by the Government of India, this paper proposes a model of optimal
currency holding when there is a possibility of currency withdrawal. Our
results indicate that if the perceived probability of withdrawal of higher
denomination currency is very high, then agents would eventually hold cash in
lower denomination currency only, thereby making the higher currency notes
redundant. Thus, one of the targets of demonetization, which is less holding of
higher currency notes, can be achieved without actually implementing
demonetization.
References
[1]
Dasgupta, D. (2016) Theoretical Analysis of Demonetisation. Economic and Political Weekly, 51, 67-71.
[2]
Kohli, V. and Ramakumar, R. (2017) Economic Rationale of Demonetisation. Economic and Political Weekly, 51, 67-71.
[3]
Kumar, A. (2017) Economic Consequences of Demonetisation Money Supply and Economic Structure. Economic and Political Weekly, 52, 14-17.
[4]
Waknis, P. (2017) Demonetisation through Segmented Markets: Some Theoretical Perspectives. Economic and Political Weekly, 52, 30-32.
[5]
Rogoff, K.S. (2016) The Curse of Cash. Princeton University Press, New Jersey.
https://doi.org/10.1515/9781400883219
[6]
Varian, H.R. (2010) Intermediate Microeconomics: A Modern Approach. 8th Edition, W. W. Norton & Company, New York.
