Linking household-corporate liquidity: Evidence from India's demonetization shock

We examine how household liquidity constraints are related to corporate cash management through a money velocity channel. Using India's 2016 demonetization as a natural experiment, we find that more exposed firms experience slower payment flows, longer cash conversion cycles, and tighter working capital conditions. These patterns are consistent with a velocity-based mechanism in which reduced household liquidity slows money circulation between households and firms. A calibrated theoretical model suggests that this channel can account for more than half of the observed transmission effects. Although the shock fades within two years, the associated firm-level responses remain economically significant, suggesting that firms may absorb household liquidity shocks on their balance sheets to stabilize operations.