The writer is the FT’s deputy editor, and chair of the FT’s Financial Literacy and Inclusion Campaign, which supports financial literacy programmes in the UK and around the world
Back in the spring Isabel Schnabel, a respected executive board member at the European Central Bank, added her voice to the growing chorus of support for financial literacy education — not out of any do-gooding sense of beneficence, but because, she said, monetary policy works better when citizens understand the basics of finance.
“Financially literate individuals react more strongly to interest rate changes, are more willing to take on risk and are more forward-looking when forming inflation expectations,” she told Bayes Business School in her Mais Lecture.
In other words, monetary transmission is more effective if society knows what the inflation rate is, and how interest rates might rise or fall over time, because that knowledge will make you more likely to borrow, spend and invest wisely, rather than randomly.
Now, a new report produced by the Centre for Economics and Business Research for US-based Principal Financial Group, has gone a few steps further, suggesting a direct link between improved financial literacy and lower loan defaults. In turn, the report suggests there is clear evidence that higher financial literacy levels can boost GDP growth.
