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Financial Reforms and Consumption Behaviour in Malawi

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  • 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.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201210.

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Length: 29 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:pre:wpaper:201210

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Keywords: Financial Liberalisation; Permanent Income Hypothesis; Linear Spline Function; Principal Component Analysis; Rule-of-Thumb;

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References

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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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