Title: Financial literacy and inflation expectations
Authors: Fabio Rumler - Austrian Central Bank (Austria) [presenting]
Maria Teresa Valderrama - Austrian Central Bank (Austria)
Abstract: The empirical literature on inflation expectations emphasizes financial literacy as one of the key determinants of consumers' inflation expectations. Using micro data from a survey conducted among 2,000 Austrian households, we construct a summary indicator of financial literacy from 10 questions on the economic and financial knowledge of households. We find that this indicator significantly affects both, the level and the uncertainty of inflation expectations: Households with relatively higher levels of financial/economic literacy tend to have lower and thus more realistic short-term and long-term inflation expectations. Also ex-post, we find that deviations of individual inflation expectations from the actual outturn are lower for consumers with higher levels of financial literacy. Concerning the effect on the uncertainty of inflation expectations, our results suggest that, interestingly, people with higher levels of financial literacy are less certain about their inflation expectations than people with less financial literacy. This suggests that a better knowledge of economic and financial matters obviously makes people more (not less) careful in their assessment of future macroeconomic developments.