Principled Identification of Structural Dynamic Models
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.
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Francis, N., Hansen, P. R., Tong, C. (2025). Principled Identification of Structural Dynamic Models. arXiv preprint arXiv:2512.17005.
Neville Francis, Peter Reinhard Hansen, and Chen Tong. "Principled Identification of Structural Dynamic Models." arXiv preprint arXiv:2512.17005 (2025).