A Comparison of Time-Varying Parameter and Multiprocess Mixture Models in the Case of Money-Supply Announcements

This study compares the performance of a recently proposed multiprocess mixture mode and a random-walk time-varying parameter (TVP) model, using the interest rate-weekly money relationship for illustrative purposes. For the case of this relationship, which is subject to regime shifts and outliers, the mixture model performs well and the latter model performs poorly. This finding is of general interest, since investigators often adopt random-walk TVP models to accommodate potential regime shifts in regression relationships. The TVP estimation procedure is unlikely to find abrupt shifts, since the estimate of parameter variance is based on the entire data sample. In the face of rapid discontinuous shifts in the parameters, this variance estimate is unrepresentative of the variability during periods of abrupt shift or transient observations.