Financial Literacy and the Financial Crisis

54 Pages Posted: 13 Apr 2012  

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

Multiple version iconThere are 3 versions of this paper

Date Written: March 1, 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.

Keywords: financial literacy, financial crisis, financial inclusion, Russia

JEL Classification: D14, D91, E21

Suggested Citation

Klapper, Leora F. and Lusardi, Annamaria and Panos, Georgios A., Financial Literacy and the Financial Crisis (March 1, 2012). Netspar Discussion Paper No. 03/2012-007. Available at SSRN: https://ssrn.com/abstract=2038765 or http://dx.doi.org/10.2139/ssrn.2038765

Leora F. Klapper

World Bank ( email )

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

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

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Annamaria Lusardi (Contact Author)

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 ( email )

Glasgow, Scotland
United Kingdom

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

Paper statistics

Downloads
78
Rank
90,166
Abstract Views
459