The impact of economic policy uncertainty on household economic vulnerability: evidence from China’s provincial-level economic policy uncertainty index

Abstract

ABSTRACT Household economic vulnerability mainly refers to the state that households may fall into financial crisis. Under the background of increasingly severe economic policy uncertainty (EPU), it is of great significance to study the impact of EPU on household economic vulnerability. By combining provincial EPU index and China Household Finance Survey (CHFS) data, this paper empirically analyzes the impact of EPU on household economic vulnerability using a fixed-effect model. We find that EPU exacerbates residents’ household economic vulnerability, and this result is still robust after multiple instrumental variables are used to correct for endogenous bias. Mechanism analysis shows that EPU aggravates household economic vulnerability mainly by restraining household investment and employment. Heterogeneity analysis shows that the impact is more pronounced in households with high household dependency ratio, low human capital of the head of household and poor social capital.