Ryan Kim (Johns Hopkins University) - Demonetization and Firm Exports

Research Seminar - Ryan Kim (Johns Hopkins University) - Demonetization and Firm Exportst

Co-author: Ritam Chaurey (Johns Hopkins University) and Pravin Krishna (Johns Hopkins University)

Abstract:
On November 8, 2016, the Government of India announced the "demonetization" of large currency bills that rendered 86 percent of currency in circulation illegal tender. Using unique, high-frequency customs transaction data matched with balance sheet information of exporting firms and both event-study design and difference-in-differences specifications, we estimate the causal effects of the demonetization on firm exports. We measure exposure to demonetization across firms using differences in expected cash flow for firms' working capital needs using pre-demonetization ratio of accounts receivables to sales. We find that firms substantially reduced their export values immediately following demonetization but recovered their exports over time. We distinguish between real and nominal effects by focusing on export prices and quantities and find that export quantities drive almost all of the short-run reductions in export values. Furthermore, we find that affected firms (also in the short run) reduced the number of product lines and product destinations for their exports and material expenses, employee compensation, and inventory stock. Our results suggest that the shortage of liquidity had a significant effect on export quantities in the short run but that the economy recovered rapidly, thus allaying concerns that the temporary shock would lead to persistent supply disruptions.

Online Research seminars organized by the Bank of Finland's Research Unit are open to all researchers interested in the subjects covered. Those wishing to attend a seminar are kindly asked to register in advance, by filling in the Online Registration Form.

The registration for each seminar is open until 9:00 am the day of the seminar. You will receive a link to join the seminar by email at the latest one hour before the seminar is scheduled to begin.