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Know More, Spend More? The Impact of Financial Literacy on Household Consumption

Author

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  • Milena Dinkova

    (Utrecht University
    CPB Netherlands Bureau for Economic Policy Analysis
    Network for Studies on Pensions, Aging and Retirement (Netspar))

  • Adriaan Kalwij

    (Utrecht University
    Network for Studies on Pensions, Aging and Retirement (Netspar))

  • Rob Alessie

    (Network for Studies on Pensions, Aging and Retirement (Netspar)
    University of Groningen)

Abstract

This paper examines the relationship between household consumption and financial literacy. The economic framework is a simple life-cycle model of consumption in which financial literacy affects the rate of return on assets. The theoretical predictions are that, for plausible values of the intertemporal elasticity of substitution, financial literacy is positively related to both the level of consumption and consumption growth. We empirically test these theoretical predictions with Dutch data from the LISS household panel. Our results provide evidence in favour of a positive association between non-durable consumption, and in particular food consumption, and financial literacy. No evidence is, however, found in favour of an association between consumption growth and financial literacy.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:decono:v:169:y:2021:i:4:d:10.1007_s10645-021-09391-4
    DOI: 10.1007/s10645-021-09391-4
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    Cited by:

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    2. Zhao, Chunkai & Wu, Yaqian & Guo, Jianhao, 2022. "Mobile payment and Chinese rural household consumption," China Economic Review, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Life-cycle model; Financial literacy; Self-assessed financial literacy; Household consumption;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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