The Political Impact of Economic Shocks: Evidence from India’s 2016 Demonetization∗ Rikhil R. Bhavnani† Mark Copelovitch‡ July 2020 Abstract Theory suggests that voters will punish politicians for negative economic shocks. We ex- amine whether this is the case by tracing the impact of the sudden, deliberate demonetization of 86% of Indias currency in 2016. Using difference-in-difference and instrumental variables analyses, we show that the negative economic impact of demonetization was felt more strongly in relatively “unbanked” areas, where people lack access to the formal financial system. Fur- ther, the BJP, the party that implemented demonetization, was penalized the least in these areas. We explore the mechanisms that might explain this important and understudied anomaly in the literature on voting. ∗We are grateful to Larry Bartels, Julia Gray, Neil Malhotra, Yotam Margalit, participants at the 2017 International Political Economy Society, the 2018 European Political Science Association, the 2018 Midwest Workshop in Empiri- cal Political Science, and Tel Aviv University for comments. Thanks to Priyadarshi Amar, Jose-Luis´ Enriquez, Alyse Samoray and Soong Kit Wong for excellent research assistance. †Associate Professor of Political Science, University of Wisconsin–Madison. Email:
[email protected]. ‡Professor of Political Science and Public Affairs, University of Wisconsin–Madison. Email:
[email protected]. How do voters respond to economic shocks? In the wake of a decade of financial crises, re- cessions, and trade, exchange rate and monetary shocks, this is an important question. A wave of recent studies has shown that financial crises (Funke, Schularick and Trebesch 2016; Guiso et al. 2019), exchange rate shocks (Ahlquist, Copelovitch and Walter 2020) and trade shocks (Autor et al.