ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Demonetisation through Segmented Markets: Some Theoretical Perspectives

The decision to demonetise 86% of India’s currency has been widely and substantially debated by notable scholars of political science and economics. This article wishes to add to that debate, by focusing on macroeconomic theory and how the policy decision affects the organised and unorganised sectors of the Indian economy­—provided certain assumptions remain in place. The following analysis is based on the money-multiplier theory and the segmented markets model of economic and monetary policy analysis.

Economic Consequences of Demonetisation

The nature of money supply and its link with transactions in the economy are discussed, with necessary modifications on account of the presence of the unorganised sector and the black economy. This helps incorporate differentiation in the Indian economy that is useful to understand and analyse the impact of demonetisation.

How the US Treasury Avoided Chronic Deflation by Relinquishing Monetary Control to Wall Street

Prior to the 1907 financial crisis, the Unites States Treasury performed nearly all the functions that later were assigned to the Federal Reserve after its creation in 1913. The political intent of the Federal Reserve--and indeed, the effect--was to shift control over money and credit away from Washington to Wall Street and other financial and business centres. This aim was voiced already in the 1830s by the Whigs in their fight with Andrew Jackson. The broad economic aim was to prevent a recurrence of the monetary deflation that had long held back the US industrial development, at first after Jackson's war on the Second Bank in the 1830s, and again after the civil war as the government forced prices for gold and other commodities back down to their pre-war levels.

Imparting Dynamism to Credit Delivery

When the economy is in dire straits the Reserve Bank cannot sit back and say it has done enough by reducing interest rates and supplying liquidity to the market. It needs to operate on many fronts - interest rate, general refinance, sector-specific refinance, directed credit norms and moral suasion - to introduce dynamism into the banks' credit delivery system.
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