TESTING FOR PARAMETER INSTABILITY IN LINEAR-MODELS

Simple tests for parameter instability are presented and discussed. These tests have locally optimal power and do not require a priori knowledge of "the breakpoint." Two empirical examples are presented to illustrate the use of the tests. The first examines whether an AR(1) model for annual U.S. output growth rates has remained stable over 1889-1987. The second examines the stability of an error correction model for an aggregate life cycle model of consumption.