Financial Knowledge and Finance Behaviors in Latin America and its Relationship with the COVID-19 Pandemic Period

Abstract

Governments worldwide conceive financial education as a crucial tool for enhancing the financial well-being of families. However, the relationship between financial knowledge and financial behaviors remains inconclusive, particularly in developing countries where a limited number of studies have explored this connection. This study employed a subjective and an objective measure of financial knowledge and assessed 16 financial behaviors of participants from Argentina, Colombia, Ecuador, Mexico, and Peru. Out of these 16 financial behaviors, 14 have a relationship with at least one of the two measures. This study found positive correlations between financial knowledge and various financial behaviors, including planning behaviors, acquisition of formal financial products, willingness to assume risks, seeking financial advice, and cautious management of their financial products. The relationship between the acquisition of informal financial products was positive with the objective financial knowledge measure but negative with the subjective measure. The identification of causal relationships proved challenging and often yield inconclusive results due to identified endogeneity issues and the presence of weak instruments. In general, during the COVID-19 period, participant displayed increased prudency in their financial practices and managing their products. This effect was larger among participants with higher levels of financial knowledge. Future research in Latin America should incorporate the distinction between financial literacy and financial knowledge, explore qualitative research designs, and evaluate the effectiveness of financial educational programs. JEL classification codes: G51, G53