Financial Literacy and the Financial Crisis

55 Pages Posted: 25 Mar 2012

See all articles by Leora F. Klapper

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Annamaria Lusardi

George Washington University - Department of Accountancy; National Bureau of Economic Research (NBER)

Georgios A. Panos

University of Glasgow - Adam Smith Business School

Multiple version iconThere are 3 versions of this paper

Date Written: March 2012

Abstract

The ability of consumers to make informed financial decisions improves their ability to develop sound personal finance. This paper uses a panel dataset from Russia, an economy in which consumer loans grew at an astounding rate - from about US$10 billion in 2003 to over US$170 billion in 2008 - to examine the importance of financial literacy and its effects on behavior. The survey contains questions on financial literacy, consumer borrowing (formal and informal), saving and spending behavior. The paper studies both the financial consequences and the real consequences of financial illiteracy. Even though consumer borrowing increased very rapidly in Russia, the authors find that only 41% of respondents demonstrate understanding of the workings of interest compounding and only 46% can answer a simple question about inflation. Financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing. Moreover, individuals with higher financial literacy are significantly more likely to report having greater availability of unspent income and higher spending capacity. The relationship between financial literacy and availability of unspent income is higher during the financial crisis, suggesting that financial literacy may better equip individuals to deal with macroeconomic shocks.

Suggested Citation

Klapper, Leora F. and Lusardi, Annamaria and Panos, Georgios A., Financial Literacy and the Financial Crisis (March 2012). NBER Working Paper No. w17930. Available at SSRN: https://ssrn.com/abstract=2028264

Leora F. Klapper (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
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202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

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Washington, DC 20433
United States

Annamaria Lusardi

George Washington University - Department of Accountancy ( email )

George Washington University School of Business
Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/profiles/annamaria-lusardi/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Georgios A. Panos

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University Avenue
Glasgow, Scotland G128QQ
United Kingdom

HOME PAGE: http://https://sites.google.com/site/georgiosapanos/

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