Hodges–Lehmann Detection of Structural Shocks – An Analysis of Macroeconomic Dynamics in the Euro Area

Helmut Herwartz

Oxford Bulletin of Economics and Statistics, 2018, vol. 80, issue 4, 736-754

Abstract: 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.

Date: 2018
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