Background
Structural break refers to a situation in econometrics where a fundamental change occurs in the underlying data-generating process of a time-series model. This change alters the parameters of the model, thereby impacting its predictive power and overall accuracy.
Historical Context
The concept of a structural break gained prominence with the rise of econometric time-series analysis in the mid-20th century. The work of scholars such as Robert Lucas brought attention to the importance of considering structural breaks when modeling economic phenomena, particularly in the context of policy changes and external shocks.
Definitions and Concepts
A structural break in a time-series model represents a one-off change in the model parameters. It denotes a shift in the process that generates the observed data, which could be due to various factors such as economic policy changes, technological innovations, or external shocks like fluctuations in oil prices.
Major Analytical Frameworks
Classical Economics
Classical economics, with its focus on long-term equilibrium, generally downplays the role of structural breaks unless they influence fundamental variables like technology or capital accumulation.
Neoclassical Economics
Neoclassical economists consider structural breaks seriously, particularly in the context of growth models where such breaks can affect productivity and long-term economic trajectories.
Keynesian Economic
Keynesian economics often highlights structural breaks resulting from fiscal and monetary policy shifts, emphasizing their impact on aggregate demand and economic cycles.
Marxian Economics
Structural breaks are analyzed within Marxian economics in the context of societal changes and technological revolutions that reshape the production modes.
Institutional Economics
Institutional economists focus on how structural breaks reflect changes in regulatory frameworks, institutional structures, and collective behavioral norms.
Behavioral Economics
Behavioral economists may examine structural breaks as changes in collective psychology or shifts in decision-making heuristics among economic agents.
Post-Keynesian Economics
Post-Keynesians emphasize the role of structural breaks involving financial instability and shifts in investment dynamics.
Austrian Economics
Austrian economists may attribute structural breaks to shifts in the entrepreneurial landscape or changes in the regulatory environment affecting market coordination.
Development Economics
In development economics, structural breaks are often associated with development thresholds, such as shifts from agrarian to industrial economies or the impact of globalization.
Monetarism
Monetarists closely monitor structural breaks in the money supply mechanics and their implications for inflation and economic stability.
Comparative Analysis
While the understanding of what can constitute a structural break may vary across schools of thought, the common thread is the significant impact these breaks have on interpreting and predicting economic data.
Case Studies
The 1973 Oil Crisis
This crisis represents a classic example of an exogenous shock causing a structural break, leading to significant changes in inflation rates and economic output across various countries.
The Global Financial Crisis of 2008
Within numerous economic models, the 2008 financial crisis prompted recalibrations to account for new risk parameters and financial market behaviors.
Suggested Books for Further Studies
- Time Series Analysis by James D. Hamilton
- Forecasting, Structural Time Series Models and the Kalman Filter by Andrew Harvey
- Econometric Analysis by William H. Greene
Related Terms with Definitions
- Unit Root: A characteristic of a time series that shows a systematic pattern which is unpredictable in the long term.
- Cointegration: A statistical property of time series variables that indicates a long-term equilibrium relationship among them.
- Exogenous Shock: An unexpected event that affects an economy from outside the economic system, usually leading to a structural change.
