Sequential moving sums of squares of OLS residuals in parameter stability testing

Conclusions

Budget-making processes within public bodies constitute processes of decision-making; how are such processes to be understood? Modelling of the budgetary process of a political system is to make conjectures concerning relationships between the dependent variable, the amount of resources allocated to an item of expenditure, and a set of independent variables, accounting for the variation in the dependent variable. In the literature on budget theory the basis and common methodological approach is that budgetary relationships are stable and may be estimated on the basis of an and mechanical decision rules that are conducive to reduction of uncertainty and to predictability of action. Although the incrementalist approach was refined through new insights in the seventies based on extensive criticism of the first studies in the fifties and sixties, the basic assumption of structural stability in budgetary equations has not been challenged. In this paper we have outlined a new approach to the interpretaion of the budgetary process based on a new technique for testing for the occurrence of shift points in budgaetary relationships. Budgetary relationships in the incrementalist approach are interpreted as decision mechanisms, and we have devised a test statistic for the occurrence of changes in decision mechanisms. If budget-making is decision-making, the focus of analysis should be on the operation of different decision principles expressing how policy-makers wish to relate to their environments. Such decision principles may be identifired with econometric parameters, which implies that a statistical test methodology is needed to detect changes in these decision principles.