Micro Responses to Macro Shocks

Abstract: We study estimation and inference in panel data regression models when the regressors of interest are macro shocks, which speaks to a large empirical literature that targets impulse responses via local projections. Our results hold under general dynamics and are uniformly valid over the degree of signal-to-noise of aggregate shocks. We show that the regression scores feature strong cross-sectional dependence and a known autocorrelation structure induced only by leads of the regressor. In general, including lags as controls and then clustering over the cross-section leads to simple, robust inference.

Keywords: panel data; local projections; impulse responses; aggregate shocks; inference; heterogeneity;

JEL Classification: C32; C33; C38; C51;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2024-03-01

Number: 1090