Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-19T12:06:59.515Z Has data issue: false hasContentIssue false
  • English
  • Français

Consumption growth, the interest rate, and financial sophistication*

Published online by Cambridge University Press:  18 July 2016

TULLIO JAPPELLI  and
MARIO PADULA
TULLIO JAPPELLI
Affiliation:
Department of Economics, Università di Napoli Federico II, Napoli, Italy (e-mail: [email protected])
MARIO PADULA
Affiliation:
Commissione di Vigilanza sui Fondi Pensione, Roma, Italy
Get access Rights & Permissions [Opens in a new window]

Abstract

We propose a model in which financial sophistication improves portfolio returns and therefore the incentive to substitute consumption intertemporally. The model delivers an 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 sophistication drawn from the Italian Survey of Household Income and Wealth. We find that consumption growth is positively correlated with financial sophistication, as predicted by the model. We also provide estimates of the intertemporal elasticity of substitution in the range between 0.4 and 0.6.

Keywords

E2D8G1J24Consumption growthEuler equationfinancial sophistication
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Special Issue 3: Financial Knowledge and Key Retirement Outcomes , July 2017 , pp. 348 - 370
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

We thank Marco Pagano and Luigi Pistaferri for helpful comments. We also thank the Italian Ministry of Education, University and Research (PRIN Project) and the European Commission 7th Framework Programme (MOPACT, SSH-2012-1/No 320333) for financial support. The opinions expressed in this article are the authors' own and do not reflect the view of Commissione di Vigilanza sui Fondi Pensione.

References

Arrow, K. J. (1987) The demand for information and the distribution of income. Probability in the Engineering and Informational Sciences, 1: 3–13.Google Scholar
Attanasio, O. and Weber, G. (1993) Consumption growth, the interest rate and aggregation. Review of Economic Studies, 60: 631–649.Google Scholar
Attanasio, O. and Weber, G. (1995) Is consumption growth consistent with intertemporal optimization? Evidence from the consumer expenditure survey. Journal of Political Economy, 103: 1121–1157.Google Scholar
Attanasio, O. P. and Low, H. (2004) Estimating Euler equations. Review of Economic Dynamics, 7(2): 405–435.Google Scholar
Bartiloro, L., Cappelletti, G., D'Amuri, F., Gamba-corta, R., Iezzi, S., Magri, S., Neri, A., and Rondinelli, C. (2010) Supplements to the statistical bulletin household income and wealth in 2008. Technical Report. Banca d'Italia.Google Scholar
Behrman, J. R., Mitchell, O. S., Soo, C., and Bravo, D. (2012) Financial literacy, schooling, and wealth accumulation. American Economic Review, 102(3): 300–304.Google Scholar
Biancotti, C., D'Amuri, F., Gambacorta, R., Ilardi, G., Neri, A., and Rondinelli, C. (2012) Supplements to the statistical bulletin household income and wealth in 2010. Technical Report. Banca d'Italia.Google Scholar
Blundell, R., Pistaferri, L., and Saporta-Eksten, I. (2012) Consumption inequality and family labor supply. NBER Working Papers 18445, National Bureau of Economic Research, Inc.Google Scholar
Calvet, L. E., Campbell, J. Y., and Sodini, P. (2007) Down or out: assessing the welfare costs of household investment mistakes. Journal of Political Economy, 115(5): 707–747.CrossRefGoogle Scholar
Calvet, L. E., Campbell, J. Y., and Sodini, P. (2009) Measuring the financial sophistication of households. American Economic Review, 99(2): 393–398.Google Scholar
Campbell, J. Y. (2003) Consumption-based asset pricing. In Constantinides, G. M., Harris, M., and Stulz, R. M. (eds), Handbook of the Economics of Finance, Vol. 1 of Handbook of the Economics of Finance. Elsevier, chapter 13, pp. 803–887.Google Scholar
Campbell, J. Y., Ramadorai, T., and Ranishy, B. (2012) Do Stock Traders Learn from Experience? Evidence from an Emerging Market. Available online at http://ssrn.com/abstract=2176222 or http://dx.doi.org/10.2139/ssrn.2176222.Google Scholar
Chamberlain, G. (1984) Panel data. In Griliches, Z. and Intriligator, M. D. (eds), Handbook of Econometrics, Volume 2. Amsterdam, North-Holland, chapter 22, pp. 1248–1318.Google Scholar
Christiansen, C., Joensen, J. S., and Rangvid, J. (2008) Are economists more likely to hold stocks? Review of Finance, 12(3): 465–496.Google Scholar
Delavande, A., Rohwedder, S., and Willis, R. (2008) Preparation for retirement, financial literacy and cognitive resources. Working Papers wp190, University of Michigan, Michigan Retirement Research Center.Google Scholar
Faiella, I., Gambacorta, R., Iezzi, S., and Neri, A. (2008) Supplements to the statistical bulletin household income and wealth in 2006. Technical Report. Banca d'Italia.Google Scholar
Feng, L. and Seasholes, M. (2005) Do investor sophistication and trading experience eliminate behavioral biases in financial markets? Review of Finance, 9: 305–351.CrossRefGoogle Scholar
Grinblatt, M. and Keloharju, Matti (2001) What makes investors trade? Journal of Finance, 56(2): 589–616.CrossRefGoogle Scholar
Hackethal, A., Haliassos, M., and Jappelli, T. (2012) Financial advisors: a case of babysitters? Journal of Banking & Finance, 36(2): 509–524.Google Scholar
Hall, R. E. (1978) The stochastic implications of the life cycle-permanent income hypothesis: theory and evidence. Journal of Political Economy, 86: 971–987.Google Scholar
Hall, R. E. (1988) Intertemporal substitution in consumption. Journal of Political Economy, 96: 339–357.CrossRefGoogle Scholar
Hastings, J. S., Madrian, B. C., and Skimmyhorn, W. L. (2012) Financial literacy, financial education and economic outcomes. NBER Working Papers 18412, National Bureau of Economic Research, Inc.Google Scholar
Jappelli, T. and Padula, M. (2013) Investment in financial literacy and saving decisions. Journal of Banking & Finance, 37(8): 2779–2792.CrossRefGoogle Scholar
Lusardi, A. (2011) Americans’ financial capability. Working Paper 17103, National Bureau of Economic Research.CrossRefGoogle Scholar
Lusardi, A. and Mitchell, O. S. (2007) Baby boomer retirement security: the roles of planning, financial literacy, and housing wealth. Journal of Monetary Economics, 54(1): 205–224.Google Scholar
Lusardi, A. and Mitchell, O. S. (2011) Financial literacy around the world: an overview. Journal of Pension Economics and Finance, 10(4): 497–508.Google Scholar
Lusardi, A., Michaud, P.-C., and Mitchell, O. S. (2013) Optimal financial knowledge and wealth inequality. NBER Working Paper 18669, National Bureau of Economic Research, Inc.Google Scholar
Murphy, K. M. and Topel, R. H. (2002) Estimation and Inference in two-step econometric models. Journal of Business and Economic Statistics, 20(1): 88–97.Google Scholar
Padula, M. and Pettinicchi, Y. (2013) Providing financial education: a general equilibrium approach. CEPR Discussion Paper 9556, Centre for Economic Policy Research.Google Scholar
Pagan, A. (1984) Econometric issues in the analysis of regressions with generated regressors. International Economic Review, 25(1): 221–247.Google Scholar
Shea, J. (1994) Should we test the life cycle–permanent income hypothesis with food consumption data? Economics Letters, 45(1): 63–68.Google Scholar
Willis, R. J. (2009) Disentangling cognitive function and financial literacy: implications for financial retirement security research. Presented at the Conference on Financial Literacy in Times of Turmoiland Retirement Insecurity, Brookings Institution, Washington, DC, 20 March 2009.Google Scholar
Zeldes, S. P. (1989) Consumption and liquidity constraints: an empirical investigation. Journal of Political Economy, 97(2): 305–346.Google Scholar
Zhu, N. (2002) The local bias of individual investors. Working Paper 02-30, Yale ICF.Google Scholar