Structural Stability and Models of the Business Cycle

Abstract

Ever since the pioneering work of Jan Tinbergen, econometric modelers have been aware of the danger that their models can be unstable over time and across policy environments. Work over the past fifteen years has produced a set of statistical procedures for identifying and modeling structural instability. This essay summarizes some of those procedures, uses them to discuss changes in the U.S. business cycle over the past four decades, and surveys some new research that tackles the widespread challenge of structural instability.