Consumption Growth, the Interest Rate, and Financial Literacy

Tullio Jappelli () and Mario Padula

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

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.

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: 2013-02-22
New Economics Papers: this item is included in nep-fdg and nep-mac
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Citations: View citations in EconPapers (3)

Published in Journal of Pension Economics and Finance, July 2017, vol. 16, 348-370

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Related works:
Working Paper: Consumption Growth, the Interest Rate, and Financial Literacy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:329

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