Financial Literacy and Economic Outcomes: Evidence and Policy Implications

Abstract

This article reviews what we have learned over the past decade about financial literacy and its relationship to financial decision making around the world. We used three questions to survey people in several countries about their level of fundamental knowledge of economics and finance, which they need to function as effective decision makers. We find that levels of financial literacy are low not only in the United States but also in many other countries, including those with well-developed financial markets. Moreover, financial illiteracy is particularly acute for some demographic groups, especially women and those who are less educated. These findings are important, since financial literacy is linked to borrowing, saving, and spending patterns. We also offer new evidence on financial literacy among high school students, drawing on the 2012 Programme for International Student Assessment implemented in 18 countries. Last, we discuss the implications of this research for policy.