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arXiv · 2512.20152

Origins and Nature of Macroeconomic Instability in Vector Autoregressions

Pooyan Amir-Ahmadi·Marko Mlikota·Dalibor Stevanović
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Abstract

For a general class of dynamic and stochastic structural models, we show that (i) non-linearity in economic dynamics is a necessary and sufficient condition for time-varying parameters (TVPs) in the reduced-form VARMA process followed by observables, and (ii) all parameters' time-variation is driven by the same, typically few sources of stochasticity: the structural shocks. Our results call into question the common interpretation that TVPs are due to "structural instabilities". Motivated by our theoretical analysis, we model a set of macroeconomic and financial variables as a TVP-VAR with a factor-structure in TVPs. This reveals that most instabilities are driven by a few factors, which comove strongly with measures of macroeconomic uncertainty and the contribution of finance to real economic activity, commonly emphasized as important sources of non-linearities in macroeconomics. Furthermore, our model yields improved forecasts relative to the standard TVP-VAR where TVPs evolve as independent random walks.

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Pooyan Amir-Ahmadi, Marko Mlikota, Dalibor Stevanović. 2025-12-23. Origins and Nature of Macroeconomic Instability in Vector Autoregressions. https://arxiv.org/abs/2512.20152

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