Abstract: The impact of debt financing on household consumption has been an ongoing debated topic in macroeconomics, and it also matters to the effectiveness of fiscal policy. By using quarterly data from 1998 to 2012 and the nonlinear Markov regime switching error-correction model, this paper re-examines the regime state, transition probability and district system of debt financing and household consumption. We find that the debt financing generally promotes the house[1]hold consumption in the whole sample period, but the effects of debt financing on household consumption in different periods are inconsistent. Specifically, most of the time before the end of 2008 it presents as a pulling-effect, and the effect is insignificant after 2008. The conclusion shows that the expenditure structure should be adjusted timely after solving the infrastructure bottlenecks, and only when fiscal expenditure turns to ensuring peoples' livelihood from infrastructure investment can it stimulates domestic demand effectively.

Keyword: government deficit finance; household consumption; ricardian equivalence