Identifying Structural Breaks in the Lebanese Economy 1970-2003: An Application of the Zivot and Andrews Test

During the 1960s and early 1970s the Lebanese economy was characterized by low inflation, high growth, sizeable balance of payments surpluses and small public sector deficits, which made it a highly attractive business centre. During this period the country was described as the Switzerland or Paris of the East. This macroeconomic stability did not last long, however, as the economy subsequently underwent fundamental structural changes during most years after the mid 1970s. The aim of this paper is to identify the timing of major structural breaks in the Lebanese economy by applying the Zivot and Andrews (ZA) (1992) procedure, using annual time series data spanning the years from 1970 through 2003. The empirical results from the ZA model, which endogenously identifies the most significant structural breaks in each of the macroeconomic variables, clearly show that the null hypothesis of at least one unit root could be rejected for some of the variables under investigation. In other words, some of the variables, which contain a unit root based on the conventional unit root test, become stationary after taking into account the existence of potential structural breaks in the series . The results are statistically significant and the endogenous structural breaks identified using this methodology also coincides with periods of major economic shocks to the Lebanese economy. More specifically, most of the structural changes are associated with: the years of the Civil War in Lebanon, which started in 1975; the post 1982 era which started with the Israeli invasion of Beirut in 1982; the deep recession in 1983-84; and the adverse effects of the 1988-89 currency depreciation on inflation and the real economy.