Demonetization Would Increase Value of Money, Demand and Growth...

The commentators on the demonetization are often heard advocating the positive long-run effects of it and that it might also cause disruption in the everyday exchanges with cash for some-time since a large part it has been replaced by new currency and digital transactions, which seems to be right. The long-run effects would play-out through the effect of money-supply on inflation and interest-rate and the value of money, however disinflation and lower interest-rate observed after the demonetization due to lower cash, although unemployment has increased temporarily with the shortage of cash to finance economic-activity, are likely to increase demand and growth-rate in the future. Inflation in INDIA has come down in the data following demonetization, moreover the expectations about jobs and incomes is not so grim because investors have only delayed investment and the improvement in the supply of cash day by day would soon help to revive investment and employment. When income is more or less fixed and inflation and inflation expectations are biased lower, would increase spending as soon as the economy adjusts to the money-supply and demand. We generally assume higher inflation while increasing money-supply, but when it is reduced we may also expect inflation to go down too because some of the demand and spending would go down. The black-economy which could be as big as a third of the white economy might be an important source of demand in the economy, especially for a home. Prior, real-estate was a cash and black-money oriented market which is now going to see a price-correction because of demonetization which is likely to increase demand of the common people, it would make homes affordable for the poor section of the country, however lower demand and prices would also lower the EMI and increase demand. When demand for construction would go up employment would go up too. The real-estate sector is an employment intensive sector which mostly uses unskilled labor; more employment would increase demand and the economic-growth. Demonetization would help the government in its mission of house for all by 2022. Lower prices signal more spending if employment and income do not go down, it is more expansionary because real-wages, real interest rate or real return on capital and real exchange rate increase domestic and external demand, lower prices could make the economy competitive. In INDIA’s case spending is only being delayed which is likely to come-back except the black-money demand and that people would find the market cheap after the pain-period is over. Demonetization could lower money-supply and increase the value of money, because it would make money scarce relative to goods and services by the way of lowering inflation and inflation expectation by reducing black-money dependent illegal demand.