Does Contractionary Monetary Policy Decrease Firm's R&D Investments? Evidence from India's Demonetisation.

This article examines the impact of the Indian Government’s 2016 demonetisation policy—specifically the overnight invalidation of ₹500 and ₹1,000 notes, which constituted about 86% of currency in circulation—on firms’ research and development (R&D) investments. Using a propensity score-matched difference-in-differences (PSM-DiD) approach, the study finds that demonetisation, as a contractionary monetary policy, significantly reduced R&D spending, particularly among firms with slower growth, lower profitability, and higher leverage. The analysis leverages pre-intervention firm tangibility to distinguish treated and control groups and confirms that the observed effects are attributable to demonetisation rather than pre-existing trends. These findings contribute empirical evidence on how monetary policy tightening can adversely affect firm innovation activities.