Financial Literacy in View of the Financial Crisis: Evidence from Russia
Abstract: The current financial crisis has generated interest in better understanding how to promote more responsible and prudent individual saving and borrowing behavior. The ability of consumers to make informed financial decisions is critical to developing sound personal finance, which can contribute to increased saving rates, more efficient allocation of financial resources, and greater financial stability. In this paper we use a unique panel dataset (2008 and 2009) from Russia, an economy where consumer loans grew at an astounding rate – from about US$ 10 billion in 2003 to over US$ 170 billion in 2008. The survey contains financial literacy questions, as well as questions on consumer borrowing (formal and informal), savings, and spending behavior. We use this dataset to study both the financial consequences and the real consequences of lower financial literacy. For instance, even though consumer borrowing is increasing very rapidly in Russia, only 41% of respondents in our sample know about the working of interest compounding and only 46% can answer a simple question about inflation. We find that financial literacy is significantly related to participation in financial markets and negatively related to the use of informal sources of borrowing, using the number of regional newspapers and universities as valid instrumental variables. Individuals with higher financial literacy are also significantly more likely to report greater unspent income and levels of spending. In addition, the relationship between financial literacy and unspent income is higher during the financial crisis, after controlling for household characteristics.