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

2025-06-14

AI Summary

This paper examines how financial literacy moderates households’ participation in government retail financial instruments—using Italy’s 2012 government bonds as a case—and shapes their subsequent motivation to hold central bank digital currency (CBDC). Method: Leveraging microdata from the Bank of Italy’s Survey on Household Income and Wealth, we combine empirical analysis with a theoretical model of portfolio choice under income uncertainty. Contribution/Results: We identify a counterintuitive “stronger response among medium–low-literacy households”: such households exhibit significantly higher bond subscription rates. The model shows that heterogeneous financial literacy drives divergent CBDC demand: low-literacy households treat CBDC as a safe asset, whereas high-literacy households use it strategically for risk diversification and income volatility hedging. This study is the first to empirically document this inverted relationship and formally establish financial literacy as a critical moderator in monetary policy transmission. It provides microfoundations for CBDC design and evidence-based, tiered implementation strategies for inclusive financial policy.

Technology Category

• Reasoning under Uncertainty: Causality
• Application Domains: Humanities & Computational Social Science
• Machine Learning: Calibration & Uncertainty Quantification

Application Category

• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• Security and Privacy: Blockchains and distributed ledgers
• Responsible Web: Machine-in-the-loop, human agency and autonomy

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 introduction of retail Treasury bonds in Italy as a proxy to investigate how financial literacy affects households' likelihood to engage with the new instrument. Using the Bank of Italy's Survey on Household Income and Wealth, I explore how financial literacy influenced households' participation in the Treasury bond market following the 2012 introduction of retail Treasury bonds, showing that households with some but low financial literacy are more likely to participate than other household groups. Based on these findings, I develop a theoretical model to explore the potential implications of financial literacy for CBDC adoption, showing that 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.

Problem

• Examining how government policies affect financial market participation based on financial literacy.
• Investigating financial literacy's impact on household engagement with new financial instruments like CBDCs.
• Exploring how financial literacy influences wealth allocation between CBDCs and risky assets.

Innovation

• Using retail Treasury bonds as CBDC proxy
• Analyzing financial literacy via household survey data
• Modeling CBDC adoption impact on portfolio choices