Essays on hand-to-mouth behavior in Asian developing countries

The growing diversity in consumption patterns in Asian developing countries is driven by a complex interplay of economic growth, sociocultural shifts, technological advancements, and policy transformations. While some consumer groups exhibit hand-to-mouth behavior due to financial constraints, limited financial planning skills, bounded rationality, or heterogeneous preferences, others develop habit-driven consumption behavior influenced by consumer inertia, social norms, or limited financial flexibility. These heterogeneous behaviors coexist as economies evolve, shaping complex and dynamic consumption patterns. Thus, from policymakers’ perspective, understanding these heterogeneous behaviors and their implications for macroeconomic policies is essential, yet evidence in Asian developing countries remains scarce. In this context, this thesis explores the prevalence of hand-to-mouth (HtM) and habit formation (HF) behaviors and their impacts on aggregate consumption dynamics and monetary policy. It pursues three specific goals across three theoretical and empirical studies. A better understanding of the popularity of these heterogeneous behaviors can make a solid foundation for macroeconomic policies intended to regulate the economy more effectively. Thus, the first study empirically tests the prevalence of HtM and HF behaviors in Asian developing countries. It confirms significant heterogeneity in consumption behaviors, with HtM behavior prevalent in 38% to 52% of the population and HF behavior affecting more than half of consumers. Understandably, HtM behavior seems more popular in low-income countries, whereas HF behavior is more common in high-income economies. Moreover, it finds weak evidence for intertemporal elasticity of substitution (IES), suggesting that aggregate consumption in these economies is less sensitive to changes in interest rates than standard models predict. These insights have critical implications for both fiscal and monetary policies. Whereas the first study strongly confirms the popularity of HtM and HF behaviors in Asian developing countries, with HF being more dominant, the second study extends this analysis by exploring the determinants of HtM behavior using the Global Findex database and its link to country-level financial access, which is measured by a novel Financial Access Index. It finds a strong negative correlation between the index and HtM behavior. Besides, lower HtM behavior is associated with higher education, receiving wages or remittances, and higher income. Having a bank account also correlates negatively, though causality remains unclear. Women and younger individuals show higher HtM tendencies, highlighting the need for targeted financial programs. Conversely, HtM behavior is positively linked to country-level macroeconomic indicators, such as unemployment, informal employment, and agricultural dependence, indicating greater financial vulnerability. The research further determines considerable heterogeneity across subgroups, with tertiary education showing the highest heterogeneity. To help better understand the roles of heterogeneous behaviors in policy outcomes, the third study examines the impact of HtM and HF behaviors on monetary policy in Indonesia, the Philippines, and Thailand using a Bayesian-estimated DSGE model. The theoretical model finds that both behaviors significantly influence output sensitivity to interest rate, challenging Bilbiie’s (2008) policy inversion. Empirical results indicate that approximately 22-34% of consumers follow HtM behavior, while nearly 50% exhibits HF behavior, highlighting the need for policies that account for diverse consumption patterns. Moreover, a policy experiment shows that while increases in the ratio of HtM consumers exaggerate monetary shock effects, they have little impact on demand and supply shocks. Together, these studies offer a comprehensive perspective on consumption behavior heterogeneity and its macroeconomic implications. The findings inform policymakers of the need for tailored monetary policy measures, more inclusive financial systems, and structural reforms to address the constraints caused by HtM and HF behaviors. By bridging theoretical modeling with empirical analysis, this thesis contributes to a deeper understanding of how consumption behaviors shape economic policy effectiveness in developing economies.

Funder

University of Galway

Publisher

University of Galway

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CC BY-NC-ND

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University of Galway Theses (PhD Theses)