Time-Varying Parameters: A Critical Introduction

One of the assumptions behind standard econometric techniques is that coefficients are fixed throughout the whole sample period or over all the cross-sectional units. This implies that the economic structure generating the data does not change, but the parameters characterizing the micro-units, along with their aggregate counterparts, do change. The present paper contains an introduction to the method of modelling parameters varying over time. In contrast to most of the existing, highly technical, surveys in this area, this paper stresses the intuitive aspects of the assumptions, limits and potentialities characterizing the time-varying parameters approach. Moreover, the most appropriate economic applications for each model are indicated, so the non-econometrician has a way of knowing what kind of problem can be fruitfully solved by this technique and what to expect from it. © 1995 Elsevier Science B.V.