6. Conclusion
We know that good financial literacy contributes to good financial decision making. However, to the best of our knowledge, this is the first study that examines the link between financial literacy and financial inclusion at the country level. This comes with the advantage that contrary to individual level studies we can control for a large number of country, institutional, and financial characteristics. Further, we are able to study the heterogeneous effects of financial literacy in relation to these financial institutions. Knowing whether financial literacy affects financial inclusion and how this effect differs for country specific variables is crucial for policy makers aiming for increasing financial inclusion. At the same time, studying financial literacy and financial inclusion on a cross country level provides more external validity compared to papers using country specific data.
We start our analysis by looking at the relationship between the proportions of people in a country that can be considered financially literate and four measures of financial inclusion. We find a positive and significant relationship between financial literacy and all four measures of financial inclusion. This result holds when controlling for a large number of country, financial and institutional characteristics. Moreover, we confirm the causal interpretation of all our results using a conventional IV strategy and conducting a large set of robustness checks, including the more recent IV-approach developed by Lewbel (2012). Hence, results suggest a clear policy message: Improving financial literacy is a worthwhile option, also at the macro level, i.e. financial education could be an important instrument of financial development in addition to the more conventional policy of expanding financial infrastructure. This is because both, the demand for financial services in the form of financial literacy and the supply of financial services, are important for financial inclusion.
