Financial Knowledge and Financial Fragility: Longitudinal Evidence from Italy

This paper analyses the role of financial knowledge on individuals' financial fragility during the COVID-19 pandemic. Using novel longitudinal data on Italian adults for the period 2020-2023 and addressing potential endogeneity issues, we find that more financially knowledgeable individuals are less likely to face difficulties in coping with unexpected expenses. Furthermore, we show that higher levels of pre-pandemic financial resilience are associated with lower financial fragility during the COVID-19 crisis. These results are robust to estimation approaches, sample composition, and measures of financial knowledge. The effect of financial knowledge on financial fragility is found to be heterogeneous across different subgroups of the population and is more beneficial for women and individuals more severely hit by the pandemic, with lower incomes and lower pre-pandemic resilience. Finally, we uncover the existence of true state dependence in the probability of being financially fragile and provide evidence that financial knowledge might also play a significant role in reducing the trapping effect of financial fragility.