Abstract
On 8 November 2016, the Indian Government demonetised ₹500 and ₹1,000 notes, which made nearly 86 per cent of the cash-in-circulation illegal tender overnight, with new ₹500 and ₹2,000 notes introduced gradually over the next several months. We exploit this intervention in a propensity score-matched difference-in-differences (PSM-DiD) framework to isolate the implications of a contractionary monetary policy on firm’s research and development (R&D) investments. Our findings suggest that India’s demonetisation policy had a detrimental effect on firm innovations in the period following its implementation. Additionally, we observe a concentration of this effect among slower-growth, less-profitable and more-leveraged firms.
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