Financial Literacy, Shocks, and Portfolio Adjustments

I develop a life-cycle model of household portfolio decisions that accounts for heterogeneity in financial literacy and employ it to examine portfolio adjustments following household-level fertility shocks. Empirical evidence suggests that households increase liquidity following such shocks. Using the model, I show that higher financial literacy is associated with smoother portfolio adjustments following shock onset. All else equal, the more financially literate households appear less susceptible to the detrimental effects of liquidity constraints. Counterfactual exercises show that financial literacy offsets the negative welfare effects of unexpected fertility shocks by at least 20%.