Financial Literacy and the Financial Crisis

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.

The Economic Importance of Financial Literacy: Theory and Evidence

“…Christiansen, Joensen, and Rangvid (2008) used the opening of a new university in a local area—arguably one of the most exogenous variables one can find— as instrument for knowledge, and they concluded that economics education is an important determinant of investment in stocks. Following this lead, Klapper, Lusardi and Panos (2012) used the number of public and private universities in the Russian regions and the total number of newspapers in circulation as instruments for financial literacy. They found that financial literacy affected a variety of economic indicators including having bank accounts, using bank credit, using informal credit, having spending capacity, and the availability of unspent income.…”

Business owner and manager’s attitudes towards financial decision-making and strategic planning: Evidence from Croatian SMEs

“…Financial literacy is important for effective decisions in the running of the business. Recent findings (Klapper, Lusardi & Panos, 2015) suggest that financial literacy exerts a high impact on business performance in the SMEs in the US.…”

La radio web como herramienta para la formación en educación financiera

“…(Klapper, Lusardi, & Oudheusden, 2015). La Organización para la Cooperación y el Desarrollo Económico -OCDE, realiza unas pruebas a estudiantes de 15 años en 73 países, dichas pruebas generan el informe PISA (Programme for International Student Assessment, por sus siglas en inglés).…”