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Providing Financial Education: A General Equilibrium Approach

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Abstract

Since the early 2000s, the importance of financial literacy for safe financial behaviors has increased in public debate and has been the motivation for several national and international institutions to launch and promote financial education initiatives. Although discussion on the effects of such education programs remains open, it is generally presumed that higher levels of financial literacy are associated with more stable financial markets. The present paper challenges this assumption and provides a model of heterogeneous agents which differ according to the level of their cognitive abilities. The model allows us to discuss the implications for asset pricing of policies aimed at increasing levels of financial literacy, and shows that general equilibrium effects cause market price volatility and the share of literate individuals to vary in a non-monotonic way with financial education.

Suggested Citation

  • Mario Padula & Yuri Pettinicchi, 2013. "Providing Financial Education: A General Equilibrium Approach," CSEF Working Papers 334, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:334
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    1. More financial education could lead to more market instability
      by Economic Logician in Economic Logic on 2013-08-29 19:27:00

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    More about this item

    Keywords

    Market stability; Asset pricing; Cognitive ability; Financial literacy; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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