Consumption Growth, the Interest Rate, and Financial Literacy
AbstractWe study a model in which financial sophistication improves portfolio returns and therefore the incentive to substitute consumption intertemporally. The model delivers a 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 literacy from the Italian Survey of Household Income and Wealth (SHIW) and an appropriate instrumental variables procedure. We find that consumption growth is positively correlated with financial literacy. Under plausible assumptions, we provide estimates of the intertemporal elasticity of substitution that are in line with those in the literature (between 0.2 and 0.4). We complement our results with direct evidence on the link between financial literacy and return on saving.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9406.
Date of creation: Mar 2013
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Other versions of this item:
- Tullio Jappelli & Mario Padula, 2013. "Consumption Growth, the Interest Rate, and Financial Literacy," CSEF Working Papers 329, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- G1 - Financial Economics - - General Financial Markets
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
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