The role of financial literacy in shaping inflation beliefs: The case of Ukraine

This paper investigates how households’ financial literacy influences their perceptions of past inflation and expectations of future price changes. Using novel survey data collected in Ukraine, we employ instrumental variable quantile regression models across various household subsamples to assess the asymmetric and heterogeneous effects of financial literacy on inflation-related beliefs. We find that the impact of financial literacy varies significantly across the distributions of inflation perceptions and expectations, shaped by distinct components – knowledge, behavior, and attitude – as well as by household characteristics such as size, income level, and place of residence. We also find that trust in the banking system enhances the accuracy of inflation beliefs, with a stronger effect as perceptions and expectations deviate from benchmarks. These findings have important implications for central banks seeking to anchor inflation expectations.