Principled Identification of Structural Dynamic Models

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.