Working Paper: CEPR ID: DP9406
Authors: Tullio Jappelli; Mario Padula
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
JEL Codes: D8; E2; G1; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial literacy (G53) | portfolio returns (G11) |
| portfolio returns (G11) | savings (D14) |
| savings (D14) | consumption growth (E20) |
| financial literacy (G53) | consumption growth (high-wealth households) (E21) |
| financial literacy (G53) | consumption growth (E20) |
| financial literacy (G53) | intertemporal elasticity of substitution (EIS) (D15) |