Abstract: In the context of increasing external environmental uncertainty, enhancing the endogenous driving force of the domestic circulation is crucial. The industrial chain and supply chain are the key to the domestic economic cycle, and the digital economy is conducive to breaking through the key bottlenecks in the operation of the domestic industrial chain and supply chain, becoming an important lever to smooth the domestic circulation. The deepening of division of labor and cooperation among various regions in China is an intuitive manifestation of the smooth domestic circulation. Taking the length of the domestic value chain as a characterization variable of the development level of the domestic circulation, this paper theoretically analyzes and empirically tests the impact of the digital economy on the domestic circulation. The findings show that the digital economy significantly promotes the increase of the length of the domestic value chain, effectively smoothing the domestic circulation. The industry heterogeneity indicates that the digital economy is conducive to the development of labor-intensive manufacturing and downstream domestic circulation, and has a stronger driving effect on the domestic circulation of non productive service industries. The heterogeneity of the digital economy in different dimensions indicates that industrial digitization, digital applications, digital infrastructure, digital industrialization, and digital development environment all contribute to the smooth circulation of the domestic economy, but their effects gradually decrease. The mechanism analysis shows that reducing market segmentation is an important mechanism for the smooth domestic circulation of the digital economy. Therefore, in order to promote the development of the domestic circulation, attention should be paid to optimizing the digital development environment, promoting the development of digital industrialization, further stimulating the empowering effect of the digital economy on high-tech industries, accelerating the construction of a unified national market, and better playing the important pivot role of the digital economy in facilitating the domestic circulation.

Key words: digital economy, input-output model, domestic circulation, market segmentation