TITLE:
A Simple Model of Currency Notes Withdrawal
AUTHORS:
Siddhartha Chattopadhyay, Sohini Sahu
KEYWORDS:
Demonetization, Expected Payoff, Risky Asset, Optimal Portfolio
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.14,
October
26,
2018
ABSTRACT: In the backdrop of the demonetization
move by the Government of India, this paper proposes a model of optimal
currency holding when there is a possibility of currency withdrawal. Our
results indicate that if the perceived probability of withdrawal of higher
denomination currency is very high, then agents would eventually hold cash in
lower denomination currency only, thereby making the higher currency notes
redundant. Thus, one of the targets of demonetization, which is less holding of
higher currency notes, can be achieved without actually implementing
demonetization.