Introduction Literature Empirical Strategy Results Discussion Political Punishment and Financial Safety Nets: Evidence from India’s Demonetization Gaurav Khanna Priya Mukherjee UCSD William & Mary Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 1 / 42
Introduction Literature Empirical Strategy Results Discussion Motivation Are Politicians Rewarded/Punished for policies? Are voters rational? Who is blamed/gets credit? Does salience matter? Unique Context: India’s Demonetization Sudden announcement: 86% of currency deemed illegal (Negative) economic consequences immediately afterwards Highly salient, and no ambiguity in who implemented policy Narratives exist on how citizens responded and why - but no clear evidence Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 2 / 42
Introduction Literature Empirical Strategy Results Discussion Demonetization suddenly announced by PM November 8, 2016: invalidate 86% of currency in circulation Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 3 / 42
Introduction Literature Empirical Strategy Results Discussion Demonetization suddenly announced PM Modi on November 8, 2016 : Demonetized 500 and 1000 rupee notes. 86% of the total currency in circulation Issuance of new 500 and 2000 rupee notes in exchange Could only draw rupee 4000 (USD 62) per person-day Deposit notes by end of year Government-stated goal : Curtail shadow economy, fight terrorism, tackle counterfeit Stock Market crash next day. GDP growth projections lowered Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 4 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 5 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 6 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 6 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 6 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 6 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 7 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 8 / 42
Introduction Literature Empirical Strategy Results Discussion “ Demonetisation was a very big mistake ...this was a shock to 86 percent of the value of currency in the market...it was no surprise that the economy went into a short recoil ” - Kaushik Basu Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 9 / 42
Introduction Literature Empirical Strategy Results Discussion Praveen Kumar/HT The man who became the face of demonetisation misery last year questioned the Bharatiya Janata Party-led government’s decision to make Rs 500 and Rs 1,000 notes illegal, the Hindustan Times reported on Wednesday. Nand Lal, a retired soldier who lives in Gurugram, was photographed crying after failing to collect his pension despite standing for three days in a queue outside a bank. Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 10 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 11 / 42
Introduction Literature Empirical Strategy Results Discussion Electoral Consequences? Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 12 / 42
Introduction Literature Empirical Strategy Results Discussion Electoral Consequences? Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 12 / 42
Introduction Literature Empirical Strategy Results Discussion Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 13 / 42
Introduction Literature Empirical Strategy Results Discussion What We Show Was BJP punished for ‘poorly implemented’ demonetization? Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 14 / 42
Introduction Literature Empirical Strategy Results Discussion What We Show Was BJP punished for ‘poorly implemented’ demonetization? Those in regions with fewer banks adversely affected Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 14 / 42
Introduction Literature Empirical Strategy Results Discussion What We Show Was BJP punished for ‘poorly implemented’ demonetization? Those in regions with fewer banks adversely affected Leverage policy experiment: (by the opposition Congress party) Congress (opposition party) increased access to banks/cash, encouraged private sector banks to enter RD design: Selected unbanked districts Implementing regime not rewarded (Less salient, slow policy) Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 14 / 42
Introduction Literature Empirical Strategy Results Discussion What We Show Was BJP punished for ‘poorly implemented’ demonetization? Those in regions with fewer banks adversely affected Leverage policy experiment: (by the opposition Congress party) Congress (opposition party) increased access to banks/cash, encouraged private sector banks to enter RD design: Selected unbanked districts Implementing regime not rewarded (Less salient, slow policy) After demonetization: (by the BJP party), less banked regions: Negative economic outcomes (nightlights) (replicate Chodorow-Reich et al) Less support for policy (survey data) Lower BJP vote share (election outcomes) Significant heterogeneity: Little to No Effects in Stronghold Areas Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 14 / 42
Introduction Literature Empirical Strategy Results Discussion Economists on Demonetization Lahiri (2019): Negative economic impacts; not achieve goals Chodorow-Reich et al 2018: contractions in employment, nightlights-based output, bank credit effects dissipate over time Banerjee & Kala 2017: surveyed 400 wholesale/retail traders 20% reported a fall in sales > 40%. Sales were 20% lower on average. Supply side effects, Subramaniam (2019); increase in deposits, Chanda and Cook (2019); perhaps other effects: for example ↑ in bank a/c or card take-up (?) Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 15 / 42
Introduction Literature Empirical Strategy Results Discussion Are Politicians Rewarded/Punished by Citizens? Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 16 / 42
Introduction Literature Empirical Strategy Results Discussion Are Politicians Rewarded/Punished by Citizens? Rational Voters Targeted programs (Manacorda et al 2011, De La O (2013) Switch to Oppositions (Blattman et al 2017) Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 16 / 42
Introduction Literature Empirical Strategy Results Discussion Are Politicians Rewarded/Punished by Citizens? Rational Voters Targeted programs (Manacorda et al 2011, De La O (2013) Switch to Oppositions (Blattman et al 2017) Random Shocks (?) Shark attacks (Achen and Bartels 2012) Oil shocks (Wolfers 2002) Rainfall shocks (Cole et al 2012) Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 16 / 42
Introduction Literature Empirical Strategy Results Discussion Are Politicians Rewarded/Punished by Citizens? Rational Voters Targeted programs (Manacorda et al 2011, De La O (2013) Switch to Oppositions (Blattman et al 2017) Random Shocks (?) Shark attacks (Achen and Bartels 2012) Oil shocks (Wolfers 2002) Rainfall shocks (Cole et al 2012) Who is blamed/gets credit? Information/salience matters (Ferraz and Finan 2008, 2011) Claiming credit (Guiteras and Mobarak 2014, Dietrich and Winters 2014, Zimmerman 2018) Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 16 / 42
Introduction Literature Empirical Strategy Results Discussion Are Politicians Rewarded/Punished by Citizens? Rational Voters Targeted programs (Manacorda et al 2011, De La O (2013) Switch to Oppositions (Blattman et al 2017) Random Shocks (?) Shark attacks (Achen and Bartels 2012) Oil shocks (Wolfers 2002) Rainfall shocks (Cole et al 2012) Who is blamed/gets credit? Information/salience matters (Ferraz and Finan 2008, 2011) Claiming credit (Guiteras and Mobarak 2014, Dietrich and Winters 2014, Zimmerman 2018) Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 16 / 42
Introduction Literature Empirical Strategy Results Discussion Empirical Strategy Voter Behavior c = β 0 + β 1 Exposure to Demonetization c + ǫ c Need exogenous variation in exposure to demonetization Access to banks/cash/ATMs Gaurav Khanna, Priya Mukherjee Political Punishment and Financial Safety Nets 17 / 42
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