DP15943 Estimating General Equilibrium Spillovers of Large-Scale Shocks

Author(s): Kilian Huber
Publication Date: March 2021
Keyword(s): estimation, financial shocks, General Equilibrium Effects, Macroeconomic Shocks, Spillovers
Programme Areas: Labour Economics, Financial Economics, International Trade and Regional Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15943

Researchers use (quasi-)experimental methods to estimate how shocks affect directly treated firms and households. Such methods typically do not account for general equilibrium spillover effects. I outline a method that estimates spillovers operating among groups of firms and households. I argue that the presence of multiple types of spillovers, measurement error, and nonlinear effects can severely bias estimates. I show how instrumental variables, heterogeneity tests, and flexible functional forms can overcome different sources of bias. The analysis is particularly relevant to the estimation of spillovers following large-scale financial and business cycle shocks.