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Structural changes in Central and Eastern European economies: breaking news or breaking the ice?

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Abstract

This paper extends the sparse existing literature on structural breaks in emerging markets in Central and Eastern Europe by analyzing structural breaks in the intercept, trend and variance of monthly key macroeconomic variables, such as industrial production, inflation, monetary aggregates, nominal exchange rates and series related to the labor market. Using the Bayesian procedure developed by Wang and Zivot (2000, A Bayesian time series model of multiple structural changes in level, trend and variance. J Busi Econom 18:374–386), we provide strong evidence in favor of multiple structural breaks in the series under study. As most of the existing empirical literature on European emerging markets does not sufficiently deal with structural breaks, the instability found in this paper has important implications for macro-econometric modeling as well as the ensuing recommendations for economic policy.

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Notes

  1. Stock and Watson (2002) and Sensier and van Dijk (2004) investigate 168 quarterly and 214 monthly US macroeconomic series. Kim and Nelson (1999), McConnell and Pérez-Quirós (2000) and Koop and Potter (2000) concentrate on US output growth while McConnell et al. (1999), Chauvet and Potter (2001) and Ahmed et al. (2002) analyze employment, consumption and income series.

  2. The recent exception is Égert and Morales-Zumaquero (2007), who conclude that while major changes in the exchange rate regime are usually matched by breaks in exchange rate volatility, exchange rate volatility breaks more often than the foreign exchange regime alters.

  3. This methodology has been recently applied on modeling and testing for multiple regime shifts in research related to the CEE economies. Gilman and Nakov (2004) applied the technique to model shifts in the relationships among money, inflation, and output growth in two new EU countries (Hungary and Poland) and find three structural breaks for each country that are linked to changes in velocity trends and to the breaks found in the other country. Another example of applying the methodology is the analysis of Camarero et al. (2005), who, by using unit root tests that account for the presence of level shifts, test for hysteresis effects versus the natural rate hypothesis on the unemployment rates of the ten new member countries of the EU. They find that the time series properties of the variables are compatible with a changing natural rate.

  4. We only concentrate on the Wang and Zivot (2000) methodology given that the ICSS algorithm developed by Inclán and Tiao (1994) presents several weaknesses (for a discussion of these, see, for example, Sansó et al. 2004; Valentinyi-Endrész 2004).

  5. For a further analysis see Wang and Zivot (2000).

  6. See Wang and Zivot (2000) for a further analysis of the properties of the Gibbs sampling algorithm.

  7. The same strategy is applied to the rest of the time series. In order to save space, we do not report all model estimates. The results are, however, available upon request.

  8. We have also considered the possibility of no break (i.e., m = 0). However, the corresponding BIC value is not the smallest in any case.

  9. It should be noted that pure time series techniques, even if highly sophisticated, often lack adequate statistical power and the clustered breaks may be just econometric artifacts.

  10. We thank one of the referees for suggesting the exposition.

  11. Rigorous incorporation of co-breaking is not feasible within the narrow scope of the paper and is left for further research.

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Authors and Affiliations

  1. Oesterreichische Nationalbank, EconomiX at the University of Paris X-Nanterre and the William Davidson Institute, Vienna, Austria

    Balázs Égert

  2. University of Salamanca, Salamanca, Spain

    Rebeca Jiménez-Rodríguez

  3. CERGE-EI, Charles University and Academy of Sciences, WDI, CEPR, Prague 1, Czech Republic

    Evžen Kočenda

  4. University of Málaga and Centro de Estudios Andaluces, Malaga, Spain

    Amalia Morales-Zumaquero

Authors
  1. Balázs Égert
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  2. Rebeca Jiménez-Rodríguez
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  3. Evžen Kočenda
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  4. Amalia Morales-Zumaquero
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Corresponding author

Correspondence to Amalia Morales-Zumaquero.

Additional information

The opinions expressed in this paper do not necessarily reflect the official position of the Oesterreichische Nationalbank, the ESCB or any other institutions the authors are affiliated with. A previous version of this paper was written while Rebeca Jiménez-Rodríguez was visiting Bank of Spain's Research Department, whose support and hospitality is gratefully acknowledged. We are indebted to Rena Muehldorf for excellent language advice.

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Égert, B., Jiménez-Rodríguez, R., Kočenda, E. et al. Structural changes in Central and Eastern European economies: breaking news or breaking the ice?. Econ Change 39, 85–103 (2006). https://doi.org/10.1007/s10644-007-9021-5

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  • DOI: https://doi.org/10.1007/s10644-007-9021-5

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