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The behavioral effects of economic agents on consumption and savings after currency reform: evidence from Ghana’s redenomination policy adaptation

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  • Bernard Bawuah

    (Simon Diedong Dombo University of Business and Integrated Development)

Abstract

Currency reform can potentially trigger currency biases in the economies that adopt the currency policy. These biases tend to impact human behavior, leading to individuals making sub-optimal economic decisions. The existing literature has mainly seen currency redenomination policy to have political and psychological dimensions. With reference to psychological tendencies in the literature and the concept of money illusion, this study is able to provide evidence that currency redenomination policy adaptation can have financing implications which have the tendency to adjust an economy’s consumption and savings behavior patterns. The study seeks to ascertain whether or not increases in domestic spending (consumption) resulting from the currency biases are enough to reduce the savings pattern in an economy, given an insignificant change in income levels of individuals. The study employed ANOVA and dynamic ordinary least squares (DOLS) empirical techniques for a two-stage analysis with data spanning from 1980 to 2018. The analysis produced a significant difference between consumption before and after the policy adaptation periods. Also, the estimated model results indicated a positive and significant relationship between savings and consumption. The study evidence suggests that the consumption and savings nexus in the Ghanaian context tilts more towards the Ricardian Equivalence. The study makes a contribution to the redenomination literature that policy implementation triggers a change in aggregate consumption through change in individuals spending that is induced by various cognitive biases. Therefore, the study recommends that researchers, policymakers, and stakeholders take a critical look at the impact of currency biases and deal with it appropriately in times of currency redenomination implementation. Specifically, post-redenomination policies should be crafted to target some of these irrational behaviors that accompany the currency reform implementation in order to attenuate the impact of these biases on the economy moving forward.

Suggested Citation

  • Bernard Bawuah, 2025. "The behavioral effects of economic agents on consumption and savings after currency reform: evidence from Ghana’s redenomination policy adaptation," SN Business & Economics, Springer, vol. 5(2), pages 1-23, February.
    • Handle: RePEc:spr:snbeco:v:5:y:2025:i:2:d:10.1007_s43546-024-00784-6
    DOI: 10.1007/s43546-024-00784-6
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    More about this item

    Keywords

    Currency reform; Currency biases; Behavioral effects; Consumption; Savings;
    All these keywords.

    JEL classification:

    • D - Microeconomics

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