Demonetisation, Crime Perception and Welfare: Theory and Evidence from Kenya

What is the welfare cost of demonetisation in emerging economies? We find Kenya’s 2019 demonetisation accelerated mobile money use, improved aggregate crime perception, and imposed income losses. Using a Two-Agent New Keynesian (TANK) model with cash-in-advance constrained households and working capital constrained informal firms, we establish three underlying general equilibrium mechanisms. First, precautionary cash hoarding by informal firms drain household liquidity and is contractionary. Second, cash-digital complementarity in agriculture exposes cash-only households to welfare losses. Third, crime perception of urban unconstrained households increases due to local wage collapse, whereas the same for constrained households decline due to reduced theft exposure.