Time Instability of the U.S. Monetary System:
Multiple Break Tests and Reduced Rank TVP VAR

Dukpa Kim
Yohei Yamamoto

February 2013


Earlier attempts to find evidence of time varying coefficients in the U.S. monetary vector autoregression have been only partially successful. Structural break tests applied to typical data sets often fail to reject the null hypothesis of no break. Bayesian inferences using time varying parameter vector autoregressions provide posterior median values that capture some important movements over time, but the associated confidence intervals are often very wide and make the entire results less conclusive. We apply recently developed multiple structural break tests and find statistically significant evidence of time varying coefficients. We also develop a reduced rank time varying parameter vector autoregression with multivariate stochastic volatility. Our model has a smaller number of free parameters thereby yielding tighter confidence intervals than previously employed unrestricted time varying parameter models.

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