Title: Structural VAR modelling with independent shocks
Authors: Helmut Herwartz - Georg-August-University Goettingen (Germany) [presenting]
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, an approach is provided 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 (LDS). A Monte Carlo study illustrates power and consistency of the proposed identification strategy in distinguishing competing ad-hoc specifications of transmission from the structural to the reduced form model. Applying the approach to a macroeconomic model of the Euro area, independent shocks conform with features of demand, supply and monetary policy shocks. A tightening of monetary policy is found to exert a dampening effect on asset prices which tapers off after six quarters.