Money Illusions: Post-Redenomination Shopping Behavior

By Prabawani, Bulan | Economics & Sociology, July 1, 2018 | Go to article overview

Money Illusions: Post-Redenomination Shopping Behavior


Prabawani, Bulan, Economics & Sociology


Introduction

Money illusion is the tendency of a person to pay more attention to the nominal value of a currency rather than its real value, i.e. purchasing power (Mees & Frances, 2014). In the context of redenomination in Indonesia, money illusion has high probability of occurence, especially if it is not accompanied by appropriate socialization (Prabawani, 2017) that causes limited economic cognition (Seiler, 2014). Money illusion is related not only to redenomination, but also to many other financial phenomena. The research of Ma, Wang, Cheng, & Hu (2018) shows that money illusion, an irrational decision, can cause nominal shock risk and affect equilibrium quantities, depending on investors' beliefs in some aspects of the economy. Yamamori, Iwata, & Ogawa (2018) added that people tend not to perform optimum consumption due to nominal values and fluctuating prices. Optimal consumption is achieved depending on the real conditions, not on the nominal value.

In Indonesia, the phenomenon of money illusion requires serious attention from the Government because its presence at the times of post redenomination threatens with the occurrence of hyperinflation (Mosley, 2005) as it happened in Ghana and Zimbabwe (Dzokoto, Mensah, Twum-Asante, & Opare-Henaku, 2010). The inflation rate in Ghana before redenomination was 10.7% and increased to 20% after redenomination (Dzokoto, Mensah, et al., 2010). Dzokoto et al. (2010)indicated that hyperinflation was due to the increasing prices for goods and services, as well as changes in spending behavior (economic factors) and social activities (social factors).

Seiler (2014) states the potential of money illusion can be reduced by conducting an adequate economic analysis. A strong policy is needed to overcome the housing bubble, especially when compared to other monetary instruments such as low interest rate and even inflation reduction (Bernanke, 2010; Brunnermeier & Julliard, 2007). In this case, households' and individual behavior becomes an important factor in estimating the impact of redenomination. Households are indeed the smallest economic entities in a community, however, their impact on the macroeconomy is significant.

Improper perceptions of the economy, growth, and risk of assets are able to change people's consumption patterns (Miao & Xie, 2013). A study by Purwana, Warokka, and Buchdadi (2012) on the lower middle class in Jakarta found that family habits in managing monthly fees play an important role in increasing the influence of money illusion, especially on urban communities. Money illusion plays a big role with the potential to disrupt the economy (Bernanke, 2010; Brunnermeier & Julliard, 2007).

Seiler (2014) shows that money illusion can be reduced if the individual thinks economically in deciding to buy a good or a service. This study explores the potential of money illusion in the behavior of household expenditure based on various individual characteristics in terms of geographic, demographic, and psychographic aspects. Hence, this research predicts that the potential for money illusion exists in the socioeconomic conditions of Indonesian people with different backgrounds. This study has also made an attempt to predict the socioeconomic groups that would be mostly likely to experience money illusion.

1.Literature review

There are a number of previous studies that explore money illusions in different countries using various theories and approaches. In China and the US, Mees & Franses (2014) used Non-parametric Pearson Chi-square tests with two-sided p-values to examine the difference in money illusions between students and Alibaba workers. As a result, there is no significant difference between money illusions in either country. This study also found that the people's consumption patterns that encourage money illusion are not only economic considerations, but also happiness, morality, and job satisfaction. …

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