How do households respond to economic policy uncertainty? Evidence from China

ABSTRACT

This article empirically examines the impacts of economic policy uncertainty (EPU) on household income and how they adjust their consumption expenditure and savings using a newly developed provincial EPU index in China. The findings show that the uncertainty shock lowers household income and households primarily responded by reducing their non-durable spending. The impacts of uncertainty shock are more pronounced in older, male-headed and urban households.

KEYWORDS:

• Economic policy uncertainty
• household income
• uncertainty shock
• consumption

JEL CLASSIFICATION:

• D12
• D14
• E21

Acknowledgments

Yongwei Chen acknowledges the financial support from National Natural Science Foundation of China (grant no. 71773144) and Science and Technology Project of Zhejiang Province (grant no. 2021C35046). Dahai Fu highly appreciates the financial support from Humanity and Social Science Foundation of Ministry of Education of China (grant no. 20YJC790024) and Program for Innovation Research in Central University of Finance and Economics.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Several papers analyse the impact of political uncertainty on household behaviours (e.g. Giavazzi and McMahon 2012; Aaberge, Liu, and Zhu 2017). The political uncertainty is different from economic policy uncertainty.

² Our findings remain consistent if we drop the province-specific fixed effects from the regressions.

³ The index can be downloaded from http://cedcdata.cufe.edu.cn/cedc/metadata/list.html

⁴ For more information about the CFPS, please access to http://www.isss.pku.edu.cn/cfps/

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71773144]; Humanity and Social Science Foundation of Ministry of Education of China [20YJC790024]; Program for Innovation Research in Central University of Finance and Economics.