On Policy Evaluation with Aggregate Time-Series Shocks

Abstract

We propose a new algorithm for estimating treatment effects in contexts where the exogenous variation comes from aggregate time-series shocks. Our estimator combines data-driven unit-level weights with a time-series model. We use the unit weights to control for unobserved aggregate confounders and use the time-series model to extract the quasi-random variation from the observed shock. We examine our algorithm's performance in a simulation based on Nakamura and Steinsson (2014). We provide statistical guarantees for our estimator in a practically relevant regime, where both cross-sectional and time-series dimensions are large, and we show how to use our method to conduct inference.

Keywords: Continuous Difference in Differences, Panel Data, Causal Effects, Treatment Effects, Unobserved Heterogeneity

JEL Classification: C18, C21, C23, C26