Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/57354 
Year of Publication: 
2011
Series/Report no.: 
CFS Working Paper No. 2011/07
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
Abstract: 
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.
Subjects: 
Financial Literacy
Cognitive Abilities
Human Capital
Saving
JEL: 
E2
D8
G1
J24
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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