Shock To Money Supply Can Have Economy-Wide Implications: Ajay Shah
A week after the government’s decision to withdraw currency notes of Rs 500 and Rs 1,000, cash remains in short supply. Withdrawals from bank branches are still restricted to Rs 24,000 a week and ATM withdrawals are limited to Rs 2,500 at one time. The government is also keeping a check on exchange of old currency notes for new currency notes to try and distribute the available stock of currency to a wider cross section of the population.
The fallout of this currency crunch is being felt across sectors like retail where cash transactions are a norm. Some economists, however, caution that the longer the currency shortage lasts, the deeper the possible economic impact. Ajay Shah, senior fellow at the National Institute of Public Finance and Policy (NIPFP) explains that a shock to the money supply of an economy can have widespread implications. The longer the shock lasts, the greater the fear of firms failing.
This is a demand shock. It’s an aggregate demand shock and can impact the entire economy in time.Ajay Shah, Senior Fellow, NIPFP
In a conversation with BloombergQuint, Shah explains the channels through which a money supply shock can spread across the economy and discusses some of the corrective measures that can be taken to limit this impact.
We have just executed a large shock to money supply so lets think of all the things we can do to count that. That does involve printing as much money as we can quickly. It does involve using formal finance to the extent possible. Do anything that you can to increase money supply.Ajay Shah, Senior Fellow, NIPFP