Principled Identification of Structural Dynamic Models

Neville Francis, Peter Reinhard Hansen and Chen Tong

No 34623, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C15 C32 E00 (search for similar items in EconPapers)
Date: 2026-01
Note: EFG ME TWP
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