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

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.