Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/243482 
Year of Publication: 
2020
Series/Report no.: 
LEM Working Paper Series No. 2020/24
Publisher: 
Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM), Pisa
Abstract: 
Independent Component Analysis (ICA) is a statistical method that transforms a set of random variables in least dependent linear combinations. Under the assumption that the observed data are mixtures of non-Gaussian and independent processes, ICA is able to recover the underlying components, but a scale and order indeterminacy. Its application to structural vector autoregressive (SVAR) models allows the researcher to recover the impact of independent structural shocks on the observed series from estimated residuals. We analyze different ICA estimators, recently proposed within the field of SVAR identification, and compare their performance in recovering structural coefficients. Moreover, after suggesting an algorithm that solve the ICA indeterminacy problem, we assess the size distortions of the estimators in hypothesis testing. We conduct our analysis by focusing on distributional scenarios that get gradually close the Gaussian case, which is the case where ICA methods fail to recover the independent components. In terms of statistical properties of the ICA estimators, we find no evidence that a method outperforms all others. We finally present an empirical illustration using US data to identify the effects of government spending and tax cuts on economic activity, thus providing an example where ICA techniques can be used for hypothesis testing.
Subjects: 
Independent Component Analysis
Identification
Structural VAR
Impulse response functions
Non-Gaussianity
Generalized normal distribution
JEL: 
C14
C32
E62
Document Type: 
Working Paper

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