Who's in? Household-targeted Government Policies and the Role of Financial Literacy in Market Participation

TL;DR

This paper investigates how household-targeted government policies and financial literacy influence market participation and CBDC demand, using empirical data from Italy's 2012 Treasury bonds and a theoretical model.

Contribution

It introduces a theoretical framework linking financial literacy to CBDC demand and provides empirical evidence on how literacy levels affect participation in government-backed financial instruments.

Findings

Households with some but low financial literacy are more likely to participate in new government bonds.

Low-literate households allocate more wealth to CBDC, while high-literate households prefer risky assets.

Financial literacy significantly influences portfolio choices and CBDC adoption.

Abstract

This paper examines how household-targeted government policies influence financial market participation conditional on financial literacy, focusing on potential Central Bank Digital Currency (CBDC) adoption. Due to the lack of empirical CBDC data, I use the 2012 introduction of retail Treasury bonds in Italy as a proxy to study how financial literacy affects households' likelihood to engage with a new government-backed retail instrument. Using the Bank of Italy's Survey on Household Income and Wealth, I show that households with some but low financial literacy are more likely to participate in the Treasury bond market than other groups following the introduction of the new instrument. Based on these findings, I develop a theoretical model to study how financial literacy affects CBDC demand through portfolio choice: low-literate households with limited access to risky assets allocate more wealth to CBDC, while high-literate households use risky assets to safeguard against income risk. These results highlight the role of financial literacy in shaping portfolio choices and CBDC adoption.