Consumption Growth, the Interest Rate, and Financial Literacy

36 Pages Posted: 3 Apr 2013

See all articles by Tullio Jappelli

Tullio Jappelli

University of Naples Federico II - Department of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Center for Studies in Economics and Finance - CSEF

Mario Padula

University "Ca' Foscari" of Venice; CSEF

Date Written: March 2013

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 Classification: D8, E2, G1, J24

Suggested Citation

Jappelli, Tullio and Padula, Mario, Consumption Growth, the Interest Rate, and Financial Literacy (March 2013). CEPR Discussion Paper No. DP9406. Available at SSRN: https://ssrn.com/abstract=2244086

Tullio Jappelli (Contact Author)

University of Naples Federico II - Department of Economics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy

HOME PAGE: http://www.csef.it/people/jappelli.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/researchers/details/rschcontact.asp?IDENT=106354

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Center for Studies in Economics and Finance - CSEF

84084 Fisciano, Salerno
Italy
+39 089 963 165 (Phone)
+39 089 963 169 (Fax)

HOME PAGE: http://www.csef.it/people/jappelli.htm

Mario Padula

University "Ca' Foscari" of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy
+390412349181 (Phone)
+390412349176 (Fax)

CSEF

Via Don Melillo I
Fisciano, Salerno, 84084
Italy

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