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Consumption growth, the interest rate, and financial sophistication

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  • JAPPELLI, TULLIO
  • PADULA, MARIO

Abstract

We propose a model in which financial sophistication improves portfolio returns and therefore the incentive to substitute consumption intertemporally. The model delivers an Euler equation in which consumption growth is positively correlated with financial sophistication. We test the model's prediction using panel data on consumption and financial sophistication drawn from the Italian Survey of Household Income and Wealth. We find that consumption growth is positively correlated with financial sophistication, as predicted by the model. We also provide estimates of the intertemporal elasticity of substitution in the range between 0.4 and 0.6.

Suggested Citation

  • Jappelli, Tullio & Padula, Mario, 2017. "Consumption growth, the interest rate, and financial sophistication," Journal of Pension Economics and Finance, Cambridge University Press, vol. 16(3), pages 348-370, July.
    • Handle: RePEc:cup:jpenef:v:16:y:2017:i:03:p:348-370_00
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    Cited by:

    1. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    2. Milena Dinkova & Adriaan Kalwij & Rob Alessie, 2021. "Know More, Spend More? The Impact of Financial Literacy on Household Consumption," De Economist, Springer, vol. 169(4), pages 469-498, November.
    3. Guiso, Luigi & Pistaferri, Luigi & Fagereng, Andreas & Blomhoff Holm, Martin, 2020. "K-Returns to Education," CEPR Discussion Papers 14310, C.E.P.R. Discussion Papers.
    4. Striani, Fabrizio, 2023. "Life-cycle consumption and life insurance: Empirical evidence from Italian Survey," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 619(C).

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