Authors: Andriy Tsapin, Oleksandr Faryna
Abstract: Using survey data from the USAID Financial Sector Transformation Project, this paper examines whether or not financial literacy influences households’ expectations about future prices and whether or not it anchors inflation expectations to the central bank’s target. We find that higher financial literacy lowers average uncertainty about one-year inflation, but increases three-year inflation expectations. The results from quantile regressions confirm the asymmetric effects of financial literacy and its components on inflation. Inverse effects of financial literacy on expected inflation are at work for the upper end of the distribution (unanchored expectations), while positive effects are seen in the lower end of the distribution (anchored expectations). Our findings also suggest that financial literacy significantly improves inflation perceptions and the accuracy of individuals’ predictions about inflation. The conclusions from this research are beneficial and have strong policy implications for the central bank’s monetary policy.
Cite as: Tsapin, A., Faryna, O. (2024). The role of financial literacy in anchoring inflation expectations: The case of Ukraine. NBU Working Papers, 2/2024. Kyiv: National Bank of Ukraine.
