ABSTRACT
This chapter discusses the various formulations of the evolution and tests of stability. It discusses the Cooley and Prescott (CP) test, which is applied to testing the stability of the demand for money functions in Canada by Rausser and Laumas. The chapter provides further familiarity with the estimation and tests of stability with the randomly varying coefficients model. The first involves the analysis of structural change in the consumption function for Canada, Japan, Netherlands, Philippines and United Kingdom. The second relates to stability for demand for money in Canada during the period covered. The chapter describes the stability test and then utilise it to test for stability of the aggregate demand for money function in Canada. The stochastically varying coefficients model, where the systematic parts vary sequentially over time, can be used to test for the stability of a functional relationship over time.
