Economic Literacy: An International Comparison

Many studies show that most people are not financially literate and are unfamiliar with even the most basic economic concepts. However, the evidence on the determinants of economic literacy is scant. This paper uses international panel data on 55 countries, merging indicators of economic literacy with a large set of macroeconomic and institutional variables. Results show that there is substantial heterogeneity of financial and economic competence across countries, and that human capital indicators (PISA test scores and college attendance) are positively correlated with economic literacy. Furthermore, inhabitants of countries with more generous social security systems are generally less literate, lending support to the hypothesis that the incentives to acquire economic literacy are related to the amount of resources available for private accumulation.Economic Literacy, Human Capital, Social Security

The Life-Cycle Hypothesis, Fiscal Policy, and Social Security

The paper reviews some of the most important results of the Life Cycle Hypothesis for understanding individual and aggregate saving behaviour. It then turns to the implications for fiscal policy and social security, highlighting Modigliani’s seminal contributions. Over time competing theories have emerged, and some empirical findings are difficult to reconcile with LCH; chiefly aspects of inertia, myopia, and irrational behaviour documented by the recent behavioural literature. But the LCH is still the benchmark model to think about individual saving decisions, the aggregate evidence and policy issues.

The Age-Wealth Profile and The Life-Cycle Hypothesis: a Cohort Analysis with a Time Series of Cross-Sections of Italian Households

In this paper I estimate the age-wealth profile under two different identification assumptions about age, cohort and time effects. According to the life-cycle model, the two set of assumptions should yield similar age-wealth profiles. Using the 1984-1993 Italian Survey of Household Income and Wealth, the estimated average annual rate of wealth decumulation in old age is found to be between 3 and 6 percent. As in the life-cycle model, the cohort effect increases with year of birth. However, the results uncover also considerable population heterogeneity: the rates of wealth decumulation are much lower for rich households and households headed by individuals with higher education.Subjective expectations, precautionary saving, excess sensitivity

Investment in financial literacy and saving decisions

We present an intertemporal consumption model of consumer investment in financial literacy. Consumers benefit from such investment because their stock of financial literacy allows them to increase the returns on their wealth. Since literacy depreciates over time and has a cost in terms of current consumption, the model determines an optimal investment in literacy. The model shows that financial literacy and wealth are determined jointly, and are positively correlated over the life cycle. Empirically, the model leads to an instrumental variables approach, in which the initial stock of financial literacy (as measured by math performance in school) is used as an instrument for the current stock of literacy. Using microeconomic and aggregate data, we find a strong effect of financial literacy on wealth accumulation and national saving, and also show that ordinary least squares estimates underestate the impact of financial literacy on saving. JEL Classification: E2, D8, G1, J24 Keywords: Financial Literacy, Cognitive Abilities, Human Capital, Savin

Intertemporal choice and consumption mobility

The theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption, not just about its conditional mean. In the paper, we study the empirical transition matrix of consumption using a panel drawn from the Bank of Italy Survey of Household Income and Wealth. We estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution. The transition matrix generated by our estimates matches remarkably well the empirical matrix, both in the aggregate and in samples stratified by education. Our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis. Klassifikation: D52, D91, I3

Investment in financial literacy, social security and portfolio choice : [version may 21, 2013]

We present an intertemporal portfolio choice model where individuals invest in financial literacy, save, allocate their wealth between a safe and a risky asset, and receive a pension when they retire. Financial literacy affects the excess return and the cost of stock market participation. Since literacy depreciates over time and has a cost related to current consumption, investors simultaneously choose how much to save, the portfolio allocation, and the optimal investment in literacy. This last depends on households' resources, its preference parameters and on how much financial literacy affects the returns on risky assets and the stock market participation cost, and the returns on social security wealth. The model implies one should observe a positive correlation between stock market participation (and risky asset share, conditional on participation) and financial literacy, and a negative correlation between the generosity of the social security system and financial literacy. The model also implies that the stock of financial literacy accumulated early in life is positively correlated with the individual's wealth and portfolio allocations later in life. Using microeconomic cross-country data, we find support for these predictions

Financial market integration under EMU

The single most important policy-induced innovation in the international financial system since the collapse of the Bretton-Woods regime is the institution of the European Monetary Union. This paper provides an account of how the process of financial integration has promoted financial development in the euro area. It starts by defining financial integration and how to measure it, analyzes the barriers that can prevent it and the effects of their removal on financial markets, and assesses whether the euro area has actually become more integrated. It then explores to which extent these changes in financial markets have influenced the performance of the euro-area economy, that is, its growth and investment, as well as its ability to adjust to shocks and to allow risk-sharing. The paper concludes analyzing further steps that are required to consolidate financial integration and enhance the future stability of financial markets

Awareness and stock market participation

The paper documents lack of awareness of financial assets in the 1995 and 1998 Bank of Italy Surveys of Household Income and Wealth. It then explores the determinants of awareness, and finds that the probability that survey respondents are aware of stocks, mutual funds and investment accounts is positively correlated with education, household resources, long-term bank relations and proxies for social interaction. Lack of financial awareness has important implications for understanding the stockholding puzzle and for estimating stock market participation costs. Klassifikation: E2, D8, G

Households’ saving and debt in Italy

We review savings trends in Italy, summarizing available empirical evidence on Italians’ motives to save, relying on macroeconomic indicators as well as on data drawn from the Bank of Italy’s Survey of Household Income and Wealth from 1984 to 2004. The macroeconomic data indicate that households’ saving has dropped significantly, although Italy continues to rank above most other countries in terms of saving. We then examine with microeconomic data four indicators of household financial conditions: the propensity to save, the proportion of households with negative savings, the proportion of households with debt, and the proportion of households that lack access to formal credit markets. By international comparison, the level of debt of Italian households and default risk are relatively low. But in light of the deep changes undergone by the Italian pension system, the fall in saving is a concern, particularly for individuals who entered the labor market after the 1995 reform and who have experienced the largest decline in pension wealth. JEL Classification: D9

Fiscal policy and MPC heterogeneity

We use responses to survey questions in the 2010 Italian Survey of Household Income and Wealth that ask consumers how much of an unexpected transitory income change they would consume. We find that the marginal propensity to consume (MPC) is 48 percent on average, and that there is substantial heterogeneity in the distribution. We find that households with low cash-on-hand exhibit a much higher MPC than affluent households, which is in agreement with models with precautionary savings where income risk plays an important role. The results have important implications for the evaluation of fiscal policy, and for predicting household responses to tax reforms and redistributive policies. In particular, we find that a debt-financed increase in transfers of 1 percent of national disposable income targeted to the bottom decile of the cash-on-hand distribution would increase aggregate consumption by 0.82 percent. Furthermore, we find that redistributing 1% of national disposable income from the top to the bottom decile of the income distribution would boost aggregate consumption by 0.33%