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Hodges–Lehmann Detection of Structural Shocks – An Analysis of Macroeconomic Dynamics in the Euro Area
Author(s) -
Herwartz Helmut
Publication year - 2018
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12234
Subject(s) - stylized fact , econometrics , identification (biology) , economics , covariance , a priori and a posteriori , monte carlo method , multivariate statistics , gaussian , basis (linear algebra) , monetary policy , macroeconomics , mathematics , statistics , physics , philosophy , botany , geometry , epistemology , biology , quantum mechanics
Structural shocks in multivariate dynamic systems are hidden and often identified with reference to a priori economic reasoning. Based on a non‐Gaussian framework of independent shocks, this work provides an approach to discriminate between alternative identifying assumptions on the basis of dependence diagnostics. Relying on principles of Hodges–Lehmann estimation, we suggest a decomposition of reduced form covariance matrices that yields implied least dependent (structural) shocks. A Monte Carlo study underlines the discriminatory strength of the proposed identification strategy. Applying the approach to a stylized model of the Euro Area economy, independent shocks conform with features of demand, supply and monetary policy shocks.