Consumption growth, the interest rate and financial sophistication

We propose a model in which financial sophistication improves portfolio returns and 8 therefore the incentive to substitute consumption intertemporally. The model delivers an 9 Euler equation in which consumption growth is positively correlated with financial 10 sophistication. We test the model’s prediction using panel data on consumption and financial 11 sophistication drawn from the Italian Survey of Household Income and Wealth. We find 12 that consumption growth is positively correlated with financial sophistication, as predicted 13 by the model. We also provide estimates of the intertemporal elasticity of substitution in the 14 range between 0.4 and 0.6.