The issue of structural change is of considerable importance in the analysis of macroeconomic time series. Structural change may occur in a time series for any number of reasons, including economic crises, changes in institutional arrangements, policy changes and regime shifts. It is, thus, of paramount importance to test the null hypothesis of structural stability against the alternative of a one-time structural break. If such structural changes do, in fact, exist in the data generating process, but are not allowed for in the specification of an econometric model, results may be biased towards the erroneous non-rejection of the non-stationarity hypothesis (Perron, 1989; Perron, 1997; Leybourne and Newbold, 2003).

A number of studies have proposed different methodologies for endogenising dates, including ZA (Zivot and Andrews, 1992), Perron (1997), LP (Lumsdaine and Papell, 1997) and Bai and Perron (2003). These studies have shown that by determining the time of structural breaks endogenously, bias in the usual unit root tests can be lessened. Perron (1997, p. 356) asserts that “…if one can still reject the unit-root hypothesis under such a scenario it must be the case that it would be rejected under a less stringent assumption”. He (1994, 1997) has put forward a class of test statistics which allows for two different forms of a structural break—the Additive Outlier (AO) model, which is more relevant for series exhibiting a sudden change in the mean (the crash model), and the Innovational Outlier (IO) model, which are designed to capture changes in a more gradual manner through time. The objective of this paper is to employ the ZA and LP models to examine structural breaks in Australia’s monetary aggregates and interest rates using all available quarterly data. The monetary aggregates and interest rate series examined are the natural logs of quarterly observations for the longest period available. The monetary measures are the Monetary Base (MB), M3 and Broad Money (BM) measured in AUD billions and expressed in constant prices using the consumer price index (1989/90 = 100). The interest rate variables are RS (a short-term interest rate) proxied by the yield on 90-day bank accepted bills) and RL (the long-run rate of return on 10-year treasury bonds). The study also includes the Consumer Price Index (CPI) in this analysis. The data have been collected from the Reserve Bank of Australia (2005), and Australian Bureau of Statistics (2005a,b).