Controlling booming foreign credit: Are more educated borrowers less likely to take out foreign currency denominated loans? -Household evidence from East Europe and Central Asia
Widespread unhedged foreign currency loans (FCL) have made households in East Europe and Central Asia vulnerable to exchange rate risk, and posed systemic financial risk to whole economies. Effective policy should control the individuals' high tendency toward FCL borrowing and protect economies foreign credit booms.This study asks the questions: Can education effectively reduce FCL borrowing? Does education play an important role to make individuals aware of the risks and borrow less FCL? Based on household survey data from 35 countries in East Europe and Central Asia, this paper studies the relationship between education and currency denomination of mortgage to explore whether more educated people borrow less foreign currency loans, and how education suppresses the tendency toward FCL borrowing.The results show that: first, education does help to reduce the FCL borrowing by improving financial literacy, and the marginal FCL-suppressing effect of improving financial literacy is larger among less educated people. However, such an effect might be interrupted by limited financial access. Thus, even though the negative relationship between education and FCL borrowing is significant among people with relatively sufficient financial access, such as individuals with at least high school education and people in more developed countries, the relationship between education and FCL borrowing is also positive among individuals with lower education levels since education increase financial access. Also, the relationship between education and FCL is insignificant in less developed countries.In conclusion, for country which has provided basic financial access to its resident, financial education does help to control booming FCL. Better policy efficiency can be achieved by focusing on less educated people. However, for countries with limited financial access, it is far more important to broaden financial access than to conduct financial education.
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