Consumer Demand Shocks and Firm Linkages: Evidence from Demonetization in India

Abstract

This paper investigates whether a consumer demand shock propagates through industry input-output networks. In November 2016, India demonetized 86% of its currency, creating a nationwide demand shock. We construct upstreamness measures to evaluate the impact of demonetization on firms based on their network position. In contrast to current literature, we find that the shock does not propagate through the network. Declines in revenues, payroll, and investment are limited to consumer facing firms. We identify pricing power, inventory frictions, and export intensity as viable explanatory mechanisms. The presence of these frictions suggests that downstream firms are particularly vulnerable to demand shocks.