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Consumption Growth, the Interest Rate, and Financial Literacy

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Abstract

We 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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  • 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.
  • Handle: RePEc:sef:csefwp:329
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    Cited by:

    1. Margherita Fort & Francesco Manaresi & Serena Trucchi, 2016. "Adult financial literacy and households’ financial assets: the role of bank information policies," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(88), pages 743-782.
    2. Klos, Alexander & Rottke, Simon, 2013. "Saving and Consumption When Children Move Out," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79786, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Consumption Growth; Euler Equation; Financial Literacy;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - 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

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