Determinants of financial literacy : evidence from the United States.

Abstract

After the global financial crisis, financial literacy has gained a noticeable position in the global policy agenda. In the period following the house market collapsed passing through the financial crisis, the Americans were reminded to open their eyes about their obsession with debt and highlighted the risks of quick access to finance for under-informed individuals. Unfortunately, only 57percent of Americans in the United States are financially literate and many Americans do not have the basic financial skills necessary to develop and maintain a budget, to understand credit and meaning of investment, or to take advantage of the banking system. Because costs of financial illiteracy not only affect individuals but might spread through the society as well, trying to explain its determinants is very important to guide future policies in improving it. In this paper, we run an ordered-probit model to find whether state-level variables such as poverty rates, unemployment, education, bankruptcy filings, income inequality and percentage of financial sector of GDP can explain differences in financial literacy in the 51 different US states. Empirical results show that in states where high poverty and unemployment rates exists, it’s more likely for such states to attain lower financial scores. However, in states where there is high education and bankruptcy filings exists, it’s more likely for such states to attain higher financial scores. However, income inequality and percentage of financial sector of GDP are insignificant and in turn are not able to explain financial score variations.