Mind the Break! Accounting for Changing Patterns of Growth during Transition

Abstract

We argue that econometric analyses based on transition countries’ data can be vulnerable to structural breaks across time and/or countries. We demonstrate this argument by identifying structural breaks in growth regressions estimated with data for 25 countries and 12 years. Our method allows identification of structural breaks at a-priori unknown points in space or time. The only prior assumption is that breaks occur in relation to progress in implementing market-oriented reforms. We find robust evidence that the pattern of growth in transition has changed at least two times, yielding thus three different models of growth associated with different stages of reform. The speed with which individual countries progress through these stages differs dramatically, however.