Abstract
The 2016-2017 economic event of a sudden demonetization in India can provide an empirical example in which to test the validity of some schools of monetary theory, particularly the Chartalist School. The Chartalist School distinguished three kinds of money: Fiat, Commodity, and Managed Money. The event provided empirical evidence that this distinction between currencies in an economy is valid and important. The sudden withdrawal of Fiat money immediately decreased the amount of commodity money, creating an economic crisis in local Indian commerce. Managed money, as bank accounts, was unable to fill the temporary gap in the supply of money because a large portion of the Indian population did not have bank accounts. Also the government did not supply a sufficient number of new 500 and 2000 rupee notes to quickly replace the withdrawn 500 and 1000 rupee notes.
Highlights
Monetary theory is a major topic in economics with a long tradition and with several schools of theory
The 2016-2017 economic event of a sudden demonetization in India can provide an empirical example in which to test the validity of some schools of monetary theory, the Chartalist School
As bank accounts, was unable to fill the temporary gap in the supply of money because a large portion of the Indian population did not have bank accounts
Summary
Monetary theory is a major topic in economics with a long tradition and with several schools of theory. Randal Wray, monetary theory identifies three kinds of money: “Fiat Money, Commodity Money, and Managed Money” [1]. Commodity money is the currency used in trade and commerce. Managed money is bank accounts used to settle debt and credit transactions in trade. The validity of any theory can be tested by how the models derived in the theory are compared to empirical reality. The validity of monetary theory is important because of the monetary and fiscal policies implemented upon the basis of theory. The economic event in 2016 of the demonetarization of the lesser notes of the Indian rupee provided an economic event-in which to study the empirical interactions of fiat, commodity, and managed money in an economy
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