DP9406 Consumption Growth, the Interest Rate, and Financial Literacy

Author(s): Tullio Jappelli, Mario Padula
Publication Date: March 2013
Keyword(s): consumption growth, Euler equation, financial literacy
JEL(s): D8, E2, G1, J24
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9406

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.