Exploring the impact of digital inclusive finance on consumption volatility: Insights from household entrepreneurship and income volatility

Abstract

The application of digital technology has reshaped all aspects of social life, and the impact of financial technology on the economy is unprecedented. Consumption is an eternal issue in economic development; however, most existing studies have concentrated on how digital inclusive Finance affects household consumption levels, giving little attention to consumption volatility. Nonetheless, policies that overlook consumption volatility are less likely to achieve societal welfare goals, particularly in developing countries. This study aims to fill this gap and unveil the “black box” of the impact of digital inclusive Finance on consumption volatility, which can benefit the development of economic resilience. Utilizing data from the China Household Finance Survey, our research assesses the impact of digital inclusive Finance on household consumption volatility and discovers that digital inclusive Finance significantly smooths out these fluctuations. Mechanism tests further indicate that the main transmission channels for this impact are promoting entrepreneurship and reducing income volatility. Moreover, heterogeneity tests show that the effect of digital inclusive Finance in smoothing household consumption volatility is more pronounced in households with sound financial standing, higher financial literacy, and internet access, especially in rural areas. These findings enrich the literature on digital inclusive Finance's role in managing volatility and extend the theory on the inclusive nature of digital inclusive Finance, offering valuable practical implications for developing countries.