The Dynamics of Shock Propagation: Theory and Evidence
Kilian Huber, Assistant Professor of Economics
We study the propagation of financial shocks through production and consumption networks. We focus on the dynamics of propagation over time, pairing new theory and data. The project is an ambitious undertaking aimed at understanding how financial disruptions to individual firms travel through the economy and generate aggregate business cycles.
On the empirical side, we assemble firm and household financial data to measure links between firms, workers, and consumers. The resulting dataset allows us to examine how shocks to individual firms spill over to other firms and households through production chains, labor markets, and household spending. We produce quasi-experimental evidence by identifying financing shocks to firms.
To interpret our results and assess their quantitative relevance, we build a dynamic network model. The model reveals which informational and real rigidities generate the dynamic pattern of propagation observed in the data. It also informs optimal policy in response to large shocks, such as the 2008 crisis and Covid.