A recursive identification method for discrete-time nonlinear cascade systems with a linear dynamic system followed by a time-varying output hysteresis is presented. The mathematical model is based on the application of a special form of Coleman–Hodgdon hysteresis model and a compound operator decomposition technique and is linear-in-parameters. The recursive least-squares algorithm with internal variable estimation is used for the time-varying parameter identification. Simulation studies show the feasibility of proposed approach to estimate the model parameters and track their changes.