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Financial Reforms and Consumption Behaviour in Malawi

Author

Listed:
  • Manoel Bittencourt

    (Department of Economics, University of Pretoria)

  • Chance Mwabutwa

    (Department of Economics, University of Pretoria)

  • Nicola Viegi

    (Department of Economics, University of Pretoria)

Abstract
The purpose of the study is to examine whether financial reforms implemented in the 1980s and 1990s altered the pattern of aggregate consumption behaviour in Malawi. More specifically, the study questions whether financial reforms affected consumption behaviour by reducing the excess sensitivity of changes in consumption to changes in current income using the Permanent income hypothesis framework. If it happens that excess sensitivity does not reduce, the paper explores further whether the failure is due to liquidity constraints or myopia. This study is unique from the rest in the sense that new constructed time series of financial reform indices are used in the estimation of the consumption function. The study finds that PIH of aggregate consumption behaviour does not exist in Malawi. Most of the consumers follow the “rule-of-thumb” of consuming their current income partly due to liquidity constraints. Although, we demonstrate that the effects of financial reforms on consumption behaviour are due to both liquidity constraints and myopic, the increase in consumption in Malawi can be explained along other factors than financial liberalisation. The excess sensitivities obtained are larger than what has been obtained in developed countries as well as other less developed countries. Liberalisation was implemented on the background of weak institutions and unstable macroeconomic environment.

Suggested Citation

  • Manoel Bittencourt & Chance Mwabutwa & Nicola Viegi, 2012. "Financial Reforms and Consumption Behaviour in Malawi," Working Papers 201210, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201210
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Chance Mwabutwa & Nicola Viegi & Manoel Bittencourt, 2012. "Monetary Policy Response to Capital Inflows in Form of Foreign Aid in Malawi," Working Papers 201232, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Financial Liberalisation; Permanent Income Hypothesis; Linear Spline Function; Principal Component Analysis; Rule-of-Thumb;
    All these keywords.

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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