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.

Understanding the Determinants of Saving in Ghana: Does Financial Literacy Matter?

“…To obtain this variable, the respondents are asked five financial literacy‐related questions or statements with binary responses: ‘yes’ and ‘no’. Subsequently, we follow the ideas and concepts of the abovementioned authors in addition to that of Klapper, Lusardi, and Panos () and create a financial literacy score on a scale of 0 to 5 based on responses provided by the respondents to the five questions constructed, and the scores are used for the analysis.…”

Financial Decisions and Financial Capabilities in the Andean Region

“…The indicator is a weighted average of these questions. To confirm that each question measured a different subfacet of conscientiousness, we carried out a principal components analysis (Garber and Koyama ; Klapper et al ). We found no strong correlation among the questions and were thus able to assume that each one represented a different subfacet.…”

“…We therefore started with a set of candidates. We took “number of universities by region” as an instrument, trying to account for exposure to financial information or to peers/colleagues with higher financial knowledge (Klapper et al ). Following the same line of thought, these FCS questions, related to an individual's exposure to sophisticated financial information, were included as instruments: (1) if the individual is aware of the concept of Deposit Insurance Funds, (2) if the individual has heard about mutual funds or investments in the stock markets, and (3) if the individual has heard about any insurance products at all.…”

Barriers to Formal Saving: Micro‐ and Macroeconomic Effects

“…Cognitive characteristics and education seem to be strongly related to financial literacy, so it is necessary to control for these variables when it comes to measuring the impact of financial literacy (McArdle et al ., ). On the other hand, there seems to be a problem of endogeneity between financial literacy and financial decision‐making (Van Rooij et al ., ; Klapper et al ., ; Lusardi and Mitchell, ). Endogeneity can arise because financial literacy and financial decision‐making are determined by the same set of variables, or because financial decisions affect financial knowledge.…”