Structural Changes in Transition Economies: Breaking the News or Breaking the Ice?

Abstract

This paper extends the existing literature in structural breaks in transition economies in Central and Eastern Europe, analyzing structural breaks in the volatility of monthly key macroeconomic variables, such as industrial production, inflation, monetary aggregates, nominal exchange rates and series related to the labor market. Using the Iterated Cumulative Sums of Squares (ICSS) algorithm developed by Inclán and Tiao (1994) and the Bayesian procedure developed by Wang and Zivot (2000), we provide strong evidence in favor of structural breaks in the variance of the series under investigation. The instability found has important implications for macroeconometric modeling.