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Financial Literacy and the Financial Crisis

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

The ability of consumers to make informed financial decisions improves their ability to develop sound personal finance. This paper uses a panel dataset from Russia, an economy in which 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 effects on behavior. The survey contains questions on financial literacy, consumer borrowing (formal and informal), saving and spending behavior. The paper studies both the financial consequences and the real consequences of financial illiteracy. Even though consumer borrowing increased very rapidly in Russia, the authors find that only 41% of respondents demonstrate understanding of the workings of interest compounding and only 46% can 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. Moreover, individuals with higher financial literacy are significantly more likely to report having greater availability of unspent income and higher spending capacity. The relationship between financial literacy and availability of unspent income is higher during the financial crisis, suggesting that financial literacy may better equip individuals to deal with macroeconomic shocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17930.

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Date of creation: Mar 2012
Date of revision:
Publication status: published as Financial Literacy and its Consequences: Evidence from Russia during the Financial Crisis,” joint with Leora Klapper and Georgios Panos, Journal of Banking and Finance, October 2013, Vol, 37, Issue 10, pp. 3904-3923.
Handle: RePEc:nbr:nberwo:17930
Note: AG
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