Consumption Growth, the Interest Rate, and Financial Literacy

Tullio Jappelli () and Mario Padula

No 9406, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study a model in which financial sophistication improves portfolio returns and therefore the incentive to substitute consumption intertemporally. The model delivers a 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 variables 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 those in the literature (between 0.2 and 0.4). We complement our results with direct evidence on the link between financial literacy and return on saving.

Keywords: Consumption growth; Euler equation; Financial literacy (search for similar items in EconPapers)
JEL-codes: D8 E2 G1 J24 (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-fdg
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Citations: View citations in EconPapers (2)

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Working Paper: Consumption Growth, the Interest Rate, and Financial Literacy (2013)
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