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Financial literacy and the financial crisis

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  • Klapper, Leora
  • Lusardi, Annamaria
  • Panos, Georgios A.

Abstract

The ability of consumers to make informed financial decisions improves their chances of having sound personal finance. This paper uses a panel dataset from Russia, where consumer loans grew at an astounding rate -- from about US$10 billion in 2003 to over US$170 billion in 2008 -- to examine the importance of financial literacy and its relationship with behavior. The survey asked questions on financial literacy, consumer borrowing (formal and informal), and spending behavior. The paper studies the consequences of greater financial literacy on the use of financial products and financial planning. Even though consumer borrowing rose rapidly in Russia, only 41 percent of the survey respondents understood how interest compounding worked and only 46 percent could answer a simple question about inflation. Financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing. Individuals with higher rates of financial literacy are significantly more likely to report having more unspent income at the end of the month and higher spending capacity. The relationship between financial literacy and the availability of unspent income is more evident during the financial crisis, suggesting that better financial literacy may better equip individuals to deal with macroeconomic shocks.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5980.

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Date of creation: 01 Feb 2012
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Handle: RePEc:wbk:wbrwps:5980

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Keywords: Financial Literacy; Access to Finance; Access&Equity in Basic Education; Education For All; Debt Markets;

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References

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  1. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," NBER Working Papers 13565, National Bureau of Economic Research, Inc.
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  15. Almenberg, Johan & Dreber, Anna, 2011. "Gender, Stock Market Participation and Financial Literacy," Working Paper Series in Economics and Finance 737, Stockholm School of Economics, revised 16 Aug 2011.
  16. Klapper, Leora & Panos, Georgios A., 2011. "Financial literacy and retirement planning : the Russian case," Policy Research Working Paper Series 5827, The World Bank.
  17. Charlotte Christiansen & Juanna Schröter Joensen & Jesper Rangvid, 2007. "Are Economists More Likely to Hold Stocks?," CREATES Research Papers 2007-08, School of Economics and Management, University of Aarhus.
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Citations

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Cited by:
  1. Dániel Béres & Katalin Huzdik, 2012. "Financial Literacy and Macro-economics," Public Finance Quarterly, State Audit Office of Hungary, State Audit Office of Hungary, vol. 57(3), pages 298-312.
  2. Daniel Berkowitz & Mark Hoekstra & Koen Schoors, 2012. "Does Finance Cause Growth? Evidence from the Origins of Banking in Russia," NBER Working Papers 18139, National Bureau of Economic Research, Inc.
  3. Klapper, Leora & Lusardi, Annamaria & Panos, Georgios A., 2013. "Financial literacy and its consequences: Evidence from Russia during the financial crisis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(10), pages 3904-3923.
  4. Annamaria Lusardi & Olivia S. Mitchell, 2013. "The Economic Importance of Financial Literacy: Theory and Evidence," NBER Working Papers 18952, National Bureau of Economic Research, Inc.
  5. Sundar, B. & Virmani, Vineet, . "Numeracy and Financial Literacy of Forest Dependent Communities Evidence from Andhra Pradesh," IIMA Working Papers WP2013-09-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
  6. Carin van der Cruijsen & David-Jan Jansen & Maarten van Rooij, 2014. "The rose-colored glasses of homeowners," DNB Working Papers, Netherlands Central Bank, Research Department 421, Netherlands Central Bank, Research Department.
  7. Bruhn, Miriam & Zia, Bilal, 2011. "Stimulating managerial capital in emerging markets : the impact of business and financial literacy for young entrepreneurs," Policy Research Working Paper Series 5642, The World Bank.
  8. Maria Semenova & Victoria Rodina, 2013. "Informal loans in Russia: credit rationing or borrower’s choice?," HSE Working papers, National Research University Higher School of Economics WP BRP 14/FE/2013, National Research University Higher School of Economics.

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