Financial Literacy, Human Capital and Long-Run Economic Growth

We extend a two-sector endogenous growth model based on human capital accumulation along two di erent directions. First, by postulating that individuals may invest time-resources not only in the accumulation of human capital (general knowledge) but also in the accumulation of nancial literacy (speci c nancial knowledge). Second, we maintain that the e ciency with which savings are transferred intertemporally may improve over time, e.g. through the presence of a nancial system. We use the model to analyze the relationship between nancial literacy and economic growth in the long run. We show that the properties of the balanced growth path equilibrium critically depend on how human capital and nancial literacy a ect the e ciency of the nancial system. Moreover, nance promotes long-run economic growth through two alternative channels, driven either by dynamics of nancial returns or by human capital accumulation, respectively. By calibrating the model to the US economy over the 1950- 2019 period, we quantitatively assess the e ect of nancial literacy on long-term growth and the relative magnitude of the two channels.