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Principled Identification of Structural Dynamic Models

Author

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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, 2026. "Principled Identification of Structural Dynamic Models," NBER Working Papers 34623, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34623
    Note: EFG ME TWP
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    More about this item

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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