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 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 literacy from the Italian Survey of Household Income and Wealth (SHIW), and an appropriate instrumental variable 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 previous literature (between 0.2 and 0.4). We complement our results with direct evidence on the link between financial literacy and the return to saving.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 329.
Date of creation: 22 Feb 2013
Date of revision:
Consumption Growth; Euler Equation; Financial Literacy;
Other versions of this item:
- Jappelli, Tullio & Padula, Mario, 2013. "Consumption Growth, the Interest Rate, and Financial Literacy," CEPR Discussion Papers 9406, C.E.P.R. Discussion Papers.
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G1 - Financial Economics - - General Financial Markets
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-09 (All new papers)
- NEP-FDG-2013-03-09 (Financial Development & Growth)
- NEP-MAC-2013-03-09 (Macroeconomics)
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