Discussion Paper Details

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Title: Consumption Growth, the Interest Rate, and Financial Literacy

Author(s): Tullio Jappelli and Mario Padula

Publication Date: March 2013

Keyword(s): consumption growth, Euler equation and financial literacy

Programme Area(s): Financial Economics and International Macroeconomics

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.

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Bibliographic Reference

Jappelli, T and Padula, M. 2013. 'Consumption Growth, the Interest Rate, and Financial Literacy'. London, Centre for Economic Policy Research.