Interest Rates and Household Consumption in China: A Keynesian Analysis of Long-Run Effects and Heterogeneity

This study examines the relationship between interest rates and household consumption in China from 1993 to 2023 within a Keynesian Consumption Framework. Using time-series OLS regressions, the study distinguishes between short-term and long-term interest rates to capture liquidity and intertemporal effects, while controlling for GDP growth rate, inflation, and ageing demographics. Separate models for rural and urban households are examined to assess regional heterogeneity. The results reveal a negative overall relationship between interest rates and household consumption, consistent with the Keynesian transmission mechanism. However, only long-term interest rates exhibit a statistically significant effect for rural households, where limited credit access amplifies sensitivity to borrowing costs. In contrast, urban consumption appears largely unaffected by monetary changes, reflecting stronger financial stability and wealth buffers. Among the control variables, the ageing population ratio exerts a robust and positive influence, absorbing the significance for interest rate variables. This suggests that demographic structure moderates the impact of interest rate fluctuations. The findings highlight that monetary policy alone is insufficient to stimulate household consumption in China. Strengthening financial inclusion, social safety systems, and demographic coordination is essential to enhance monetary transmission and support China further towards a more consumption-driven and regionally balanced economy.