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Principled Identification of Structural Dynamic Models

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  • Neville Francis
  • Peter Reinhard Hansen
  • Chen Tong

Abstract

We take a new perspective on identification in structural dynamic models: rather than imposing restrictions, we optimize an objective. This provides new theoretical insights into traditional Cholesky identification. A correlation-maximizing objective yields an Order- and Scale-Invariant Identification Scheme (OASIS) that selects the orthogonal rotation that best aligns structural shocks with their reduced-form innovations. We revisit a large number of SVAR studies and find, across 22 published SVARs, that the correlations between structural and reduced-form shocks are generally high.

Suggested Citation

  • Neville Francis & Peter Reinhard Hansen & Chen Tong, 2025. "Principled Identification of Structural Dynamic Models," Papers 2512.17005, arXiv.org.
    • Handle: RePEc:arx:papers:2512.17005
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    File URL: http://arxiv.org/pdf/2512.17005
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