DP9556 Providing financial education: a general equilibrium approach

Author(s): Mario Padula, Yuri Pettinicchi
Publication Date: July 2013
Keyword(s): Asset pricing, Cognitive ability, Financial literacy, Heterogeneous agents, Market stability
JEL(s): D82, G12, G14, G18
Programme Areas: Labour Economics, Public Economics, Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9556

Since the early 2000s, the importance of financial literacy for safe financial behaviors has increased in public debate and has been the motivation for several national and international institutions to launch and promote financial education initiatives. Although discussion on the effects of such education programs remains open, it is generally presumed that higher levels of financial literacy are associated with more stable financial markets. The present paper challenges this assumption and provides a model of heterogeneous agents which differ according to the level of their cognitive abilities. The model allows us to discuss the implications for asset pricing of policies aimed at increasing levels of financial literacy, and shows that general equilibrium effects cause market price volatility and the share of literate individuals to vary in a non-monotonic way with financial education.