How does economic policy uncertainty affect the relationship between household debt and consumption?

This paper investigates the effect of economic policy uncertainty on the consumption response to household debt using household-level data from China. Our results suggest that there is a positive relationship between household debt and consumption. However, a higher level of economic policy uncertainty not only weakens this positive relationship but also inhibits the effect of household debt on the consumption structure. In addition, the negative impacts of policy uncertainty are stronger among households that are more liquidity constrained, whose heads have lower cognitive abilities and financial literacy, and that are located in provinces with lower levels of digital financial inclusion.