Thesis advisor: Ryan Chahrour / Thesis advisor: Fabio Schiantarelli / This dissertation consists of three chapters. The first chapter, "The Supply-Side Effects of India's Demonetization", investigates the supply-side effects of a unique monetary shock – the 2016 Indian demonetization – that made 86% of currency in circulation illegal overnight. Exploiting cross-sectional variation in firm and industry characteristics that correlate with cash usage and exposure to the informal sector, I find that firms that use cash more and obtain larger shares of labor or material inputs from the informal sector, experienced declines in their labor and material shares after demonetization. I also show that casual laborers were more likely to report being unemployed in the months following demonetization. These findings document a supply channel for demonetization and also show that cash plays an essential role in India's informal sector. Crucially, given that India's formal sector is highly dependent on the informal sector for labor and materials, any shock to the supply of cash is likely to have affected the economy as a whole. In the second chapter, "Directed Lending and Misallocation: Evidence from India", joint with Deeksha Kale, we leverage a natural experiment to study whether targeted credit policy can help reduce misallocation. In 2006, the Government of India modified the definition of small firms thereby expanding eligibility to a directed credit program. We show that the credit policy changed eligible firms' input wedges and thereby reduced misallocation. For firms with initially higher MRPK, the policy resulted in relatively larger increases in physical capital and decreased the MRPK. This policy moderately reduced within-industry dispersion of MRPK and increased aggregate productivity. Finally, in the third chapter, "Victims of Consequence: Evidence on Child Outcomes using Microdata from a Civil War", joint with Sajala Pandey, we study the short-run impacts of violent events on child time allocation, curative health-care, and education. Exploiting spatial and temporal variation in exposure to local-level armed conflict, we find that an increase in violent events: (i) leads to an increase in contemporaneous hours worked by children, with the effect being substantial for agricultural work; (ii) decreases the likelihood of parents taking their children to visit a health-care facility to seek curative care; and (iii) results in a reduced likelihood of attending school, along with a decline in years of education. Overall, the results indicate that the war affected schooling and time allocation of boys whereas girls were less likely to get curative health-care. / Thesis (PhD) — Boston College, 2020. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

Demonetization is an economic tool used to reduce the size of an underground economy. Though studies on the effectiveness of demonetization have increased over the past 50 years, there is little literature on the ineffectiveness of demonetization and subsequent factors that could explain a lack of change, or an increase, in illegal activity. This paper examines past cases of demonetization to determine the effectiveness of demonetization, and investigates the incentive for foreign currency substitution as a mechanism for criminals to circumvent regulatory scrutiny. Major findings of this paper include a positive but statistically insignificant correlation between demonetization and growth in the shadow economy, and a statistically significant positive relationship between exchange rate appreciation and demonetization. Finally, this paper applies these findings to test the “Modi effect” of Indian Rupee (INR) demonetization.

On the 8th of November, 2016, Prime Minister Modi declared all Rs. 500 and Rs. 1000 notes in circulation, constituting 86% of the currency, to be illegal tender for transactions. All the currency had to be deposited into bank accounts, and new notes would be issued. Amounts deposited over Rs. 250,000 (approx. USD 4000) would face tax scrutiny. The reasoning given for this was to curb corruption, terrorism financing and counterfeiting. This led to a scramble in the economy, giving rise to many dubious schemes for evading the consequences of this policy. There was a significant loss in income for people, however, they were willing to bear the short term pain, in the promise of medium to long term gain. Economists and political thinkers are divided on the merits of this matter. We tested the varied effect of demonetization on the Indian economy by examining the returns of the National Stock Exchange using the Event Study Methodology in the immediate period following demonetization. We found a statistically significant decline in consumption sectors. This was largely driven by decline in the ability to spend. Public Sector Banks (PSBs) saw huge positive abnormal returns, while the Private Banks recorded a lagged negative effect. This may be because the PSBs were riddled with NPAs and in dire need of liquidity, or because of the market’s differentiated perception of corruption within these portfolios. We also find State-Owned Companies to benefit from the announcement.

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