Chapter 21 Random and changing coefficient models

Abstract

Publisher Summary This chapter discusses that the standard linear regression model has been an attractive model to use in econometrics. If econometricians can uncover stable economic relations that satisfy at least approximately the assumptions of this model, they deserve the credit and the convenience of using it. Sometimes, however, econometricians are not lucky or ingenious enough to specify a stable regression relationship, and the relationship being studied gradually changes. Under such circumstances, an option is to specify a linear regression model with stochastically evolving coefficients. The chapter also reviews that for the purpose of parameter estimation, this model takes into account the possibility that the coefficients may be time dependent and provides estimates of these coefficients at different points of time. For the purpose of forecasting, this model has an advantage over the standard regression model in utilizing the estimates of the most up-to-date coefficients. From the viewpoint of hypothesis testing, this model serves as a viable alternative to the standard regression model for the purpose of checking the constancy of the coefficients of the latter model.