Unpacking the role of financial literacy in the debt-mental health nexus: evidence from China.

INTRODUCTION

Despite the growing challenges associated with household debt, research on factors influencing its relationship with psychological well-being remains limited. This study investigates the role of financial literacy in the nexus between household indebtedness and mental health, addressing a significant gap in the literature.

METHODS

Using data from the China Family Panel Studies (CFPS) 2014 wave, a nationally representative dataset, we analyze how financial literacy interacts with household debt and mental health outcomes. Multiple model specifications are employed to assess the moderating and mediating effects of financial literacy.

RESULTS

Our findings reveal two key roles of financial literacy: (1) it improves mental health by reducing household indebtedness, and (2) it moderates the negative relationship between debt and mental health. Notably, basic financial literacy is a critical factor, particularly in explaining the effects of non-housing debt (as opposed to housing debt).

DISCUSSION

The study highlights the dual function of financial literacy in mitigating the adverse psychological effects of household debt. Policymakers and financial educators should consider promoting financial literacy as a tool to enhance mental health, especially in contexts of high indebtedness. Future research could explore additional mediators and cultural variations in this relationship.