Chronic Macroeconomic Vulnerability in Transition Economies: Evidence from Republic of Moldova's Inflation Regime Changes

Abstract

This study analyzes Republic of Moldova's Consumer Price Index (1991-2025) to examine structural vulnerabilities and external shock impacts on transition economies. Using Chow Test for structural breaks and Facebook's Prophet for counterfactual forecasting, we investigate persistent inflationary pressures and regime changes in Republic of Moldova's price formation mechanisms. The analysis reveals severe macroeconomic instability, including hyperinflation during early transition 1991-1995. Statistical evidence, using the Chow Test, confirms a significant structural break in February 2022. Counterfactual analysis demonstrates that absent this structural break, Republic of Moldova's Consumer Price Index would have been 35.9% lower by May 2025, indicating permanent economic repricing rather than temporary adjustment. Using Log-Linear autoregressive modeling, we model the Consumer Price Index gap to estimate the half-life of the structural break's impact. We find that the break has an effectively infinite half-life, indicating no natural decay in the gap between actual and counterfactual paths. This represents a fundamental transformation in price dynamics, with inflation volatility increasing 35.4-fold and welfare losses of 15.1%. These findings highlight critical vulnerabilities including extreme import dependence, institutional weaknesses, and inadequate shock absorption mechanisms. The research challenges conventional small open economy theories and provides empirical evidence for comprehensive structural reforms in energy security, monetary policy frameworks, fiscal stabilization, and regional cooperation to enhance macroeconomic resilience. JEL: C22, E31, E58, F41, P20