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

19 Pages Posted: 3 Jul 2018

See all articles by Helmut Herwartz

Helmut Herwartz

University of Goettingen (Gottingen)

Date Written: August 2018

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.

Suggested Citation

Herwartz, Helmut, Hodges–Lehmann Detection of Structural Shocks – An Analysis of Macroeconomic Dynamics in the Euro Area (August 2018). Oxford Bulletin of Economics and Statistics, Vol. 80, Issue 4, pp. 736-754, 2018. Available at SSRN: https://ssrn.com/abstract=3206999 or http://dx.doi.org/10.1111/obes.12234

Helmut Herwartz (Contact Author)

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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