13. Macroeconomic, Financial and Global Business Environment

Introduction and Context

Managerial economics is concerned not only with decisions inside the firm but also with the external conditions that shape the value, risk, and feasibility of those decisions. A firm may possess strong capabilities, an attractive product, and competent leadership, yet perform poorly because inflation erodes margins, interest rates increase financing costs, exchange-rate movements disrupt purchasing power, or geopolitical conflict interrupts critical supplies. Macroeconomic and global conditions therefore form part of the strategic environment in which managerial choices are made.

The central difficulty is that managers must act under uncertainty. Macroeconomic variables are interconnected, partly endogenous to policy, and influenced by expectations. A rise in interest rates may reduce consumer demand and investment, but it may also strengthen a currency, lower imported input costs, and improve returns to cash-rich firms. Similarly, depreciation may harm an importer while benefiting an exporter. The managerial task is not simply to forecast one variable; it is to understand transmission mechanisms, construct alternative scenarios, and design decisions that remain robust across plausible futures.

This chapter examines inflation, interest rates, exchange rates, business cycles, international trade, geopolitical risk, and monetary and fiscal policy. It links these forces to demand, costs, investment, financing, supply chains, and international strategy. The discussion also considers analytical tools, governance responsibilities, digital applications, and emerging developments relevant to doctoral-level business research and practice.

Learning Objectives

By the end of this chapter, the reader should be able to:

1. Explain how macroeconomic variables influence firm revenues, costs, investment, financing, and valuation.

2. Distinguish among inflation, interest-rate, exchange-rate, business-cycle, trade, and geopolitical risks.

3. Apply open-economy frameworks to managerial and strategic decisions.

4. Evaluate the effects of monetary and fiscal policy on different industries and stakeholder groups.

5. Use scenario analysis, sensitivity analysis, and selected financial instruments to manage uncertainty.

6. Critically assess the assumptions and limitations of macroeconomic forecasting.

7. Integrate macroeconomic intelligence into international strategy, governance, and responsible decision-making.

The Macroeconomic Environment as a System of Transmission Mechanisms

Macroeconomic indicators matter because they alter the constraints and incentives facing firms. Gross domestic product (GDP) indicates aggregate production and income, but its usefulness depends on composition: growth driven by household consumption has different implications from growth driven by public infrastructure or exports. Productivity affects unit costs and long-run competitiveness. Unemployment influences household income, labour availability, wage pressure, and consumer confidence. Inflation changes the real value of money, while interest rates determine the opportunity cost of capital and the cost of borrowing.

Managers should distinguish between nominal and real variables. A nominal revenue increase may reflect only higher prices rather than higher quantities or improved productivity. The approximate relationship is:

Real growth ≈ nominal growth − inflation.

The real interest rate can similarly be approximated as:

Real interest rate ≈ nominal interest rate − expected inflation.

These relationships are simplified, but they prevent a common error: interpreting money values without considering purchasing power. A firm whose sales rise by 8 percent during 10 percent inflation may actually be experiencing a decline in real sales.

Macroeconomic transmission is rarely immediate. Monetary policy affects financial markets quickly, borrowing decisions with a lag, and employment and demand more slowly. Exchange-rate movements may influence imported input costs almost immediately, although contractual arrangements, inventories, and hedging delay the effect. Managers must therefore consider both the size and timing of an economic shock.

Inflation: Pricing, Costs, and Real Performance

Inflation is a sustained increase in the general price level. It differs from a one-time price increase, which may result from a temporary shortage or a firm-specific decision. Inflation can arise from excessive aggregate demand, rising production costs, supply disruptions, expansion of the money supply relative to output, or adaptive and forward-looking expectations. In practice, these causes may interact.

Demand-pull inflation occurs when aggregate demand exceeds productive capacity. Cost-push inflation arises when wages, energy, commodities, logistics, or imported inputs become more expensive. Built-in inflation reflects the interaction of wage expectations, price-setting, and indexation. A useful managerial distinction is between headline inflation, which includes volatile categories, and core inflation, which attempts to identify more persistent underlying pressure.

Inflation affects firms through several channels. It increases input costs, complicates pricing, reduces the real value of receivables, changes working-capital requirements, and may distort performance measurement. Inventory accounting becomes strategically important: a firm purchasing inventory before a price rise may report higher nominal margins, even though replacing that inventory will be more expensive. Inflation also changes customer behaviour. Consumers may trade down, delay discretionary purchases, switch brands, or accelerate purchases of durable goods.

Pricing under inflation requires more than mechanically applying a percentage increase. Managers should examine price elasticity, customer segmentation, contractual terms, competitor behaviour, and the distinction between temporary and persistent cost shocks. Possible responses include shorter quotation validity, index-linked contracts, smaller pack sizes, tiered offerings, selective price increases, productivity programs, and redesign of the product or process. Ethical concerns arise when firms exploit uncertainty or market power to impose unjustified increases.

Interest Rates, Capital Allocation, and Financial Structure

Interest rates coordinate saving, borrowing, investment, and consumption. A central bank generally influences short-term rates, while longer-term rates also reflect inflation expectations, fiscal conditions, risk premiums, and global capital flows. The yield curve—the relationship between interest rates and maturities—contains information about market expectations, although it is not a perfect forecast of economic activity.

Higher interest rates increase the cost of new debt and may raise the cost of floating-rate existing debt. They also increase the discount rate used in capital budgeting. Since the present value of future cash flows is:

PV = CFₜ / (1 + r)ᵗ,

where r is the relevant discount rate, long-lived projects are often more sensitive to rate increases than projects generating cash quickly. Higher rates can reduce asset valuations, weaken housing and durable-goods demand, and make highly leveraged firms vulnerable. Conversely, savers and firms holding liquid assets may receive greater interest income.

Investment decisions should therefore use scenario-based weighted average cost of capital (WACC), debt-service coverage, refinancing schedules, and stress tests rather than relying on one forecast rate. The appropriate question is not whether interest rates are “high” in isolation, but whether expected project returns adequately compensate for the opportunity cost and risk of capital.

Capital structure also matters. Debt may provide tax advantages and discipline, but excessive leverage magnifies losses and refinancing risk. Firms with long-term fixed-rate debt may be protected from rising rates but unable to benefit quickly when rates fall. Financial strategy must align maturity structure, currency denomination, covenants, liquidity reserves, and operating cash flows.

Exchange Rates and the Economics of an Open Firm

An exchange rate is the price of one currency in terms of another. An appreciation makes foreign currency goods cheaper in domestic-currency terms and can reduce the value of foreign revenues when translated into the home currency. A depreciation has the opposite immediate effect. The ultimate consequences depend on the firm’s invoicing currency, input composition, competitive position, hedging policy, and market structure.

Three exposures are particularly important. Transaction exposure concerns contractual foreign-currency cash flows. Translation exposure concerns conversion of foreign subsidiaries’ financial statements into the reporting currency. Economic exposure concerns the longer-term effect of currency movements on competitiveness, demand, sourcing, and enterprise value.

The law of one price and purchasing power parity suggest that identical goods should have comparable prices after currency conversion, but transport costs, taxes, market segmentation, quality differences, and non-tradable services prevent perfect equalization. Interest-rate parity links interest-rate differentials to forward exchange rates, though risk premiums and capital-market imperfections complicate the relationship.

A firm can respond through natural hedging—matching foreign-currency revenues with expenses—or through financial hedging using forwards, futures, options, and swaps. Hedging is not a method of guaranteeing profit; it is a method of reducing undesirable uncertainty. A forward contract provides certainty but removes favourable upside. An option provides flexibility but requires a premium. Governance should specify which exposures may be hedged, acceptable instruments, counterparty limits, and reporting requirements.

Business Cycles and Strategic Timing

Business cycles describe fluctuations in aggregate economic activity. Although cycles do not follow a fixed, predictable pattern, analysts often identify expansion, peak, contraction, and trough phases. The effects differ by sector. Luxury goods, construction, advertising, and capital equipment are generally more cyclical than essential food, healthcare, and basic utilities, although no industry is completely insulated.

Leading indicators, such as new orders, consumer expectations, credit conditions, and building approvals, may provide early signals. Coincident indicators describe current activity, while lagging indicators confirm developments after they occur. Managers should avoid treating any single indicator as decisive. A decline in GDP, for example, may coexist with strong demand in a particular region or industry.

A cycle-aware strategy may involve flexible capacity, variable labour arrangements, conservative leverage, countercyclical acquisitions, and differentiated product portfolios. During expansion, firms may invest in capacity and market development, but they should avoid extrapolating temporary demand into permanent growth. During contraction, indiscriminate cost cutting can destroy capabilities and customer relationships. Resilience often requires protecting research, maintenance, talent, and supplier relationships even while reducing nonessential expenditure.

Trade, Global Value Chains, and International Strategy

International trade permits specialization, access to larger markets, technology transfer, and economies of scale. Comparative advantage explains why countries can gain from trade even when one country is more productive in every activity: the relevant issue is relative opportunity cost. However, trade benefits are distributed unevenly. Workers, regions, and firms exposed to import competition may bear adjustment costs, while consumers and export-oriented sectors gain.

Trade policy includes tariffs, quotas, subsidies, local-content rules, export controls, sanctions, customs procedures, and technical standards. A tariff raises the domestic price of an imported product, benefiting protected producers but imposing costs on consumers and downstream firms using the product as an input. Non-tariff barriers can be less visible but equally significant.

Global value chains divide design, sourcing, production, logistics, marketing, and after-sales activities across jurisdictions. Their efficiency can be undermined by port congestion, cyberattacks, pandemics, conflict, sanctions, extreme weather, or sudden regulatory changes. The lowest purchase price is not necessarily the lowest total cost. Managers should evaluate total landed cost, lead-time variability, inventory carrying cost, quality, compliance, switching difficulty, and the probability and impact of disruption.

Strategic responses include dual sourcing, regionalization, postponement, supplier development, strategic inventories, modular product design, and nearshoring. Diversification must be balanced against lost scale economies and coordination costs. Resilience does not mean eliminating all risk; it means creating the capacity to absorb, adapt to, and recover from disruption.

Geopolitical Risk and the Political Economy of Business

Geopolitical risk arises when political relations, conflict, government action, or institutional instability affect economic activity. It may take the form of war, sanctions, expropriation, regulatory discrimination, political violence, election-related uncertainty, diplomatic rivalry, or restrictions on technology and data flows. Geopolitical risk is often nonlinear: a small deterioration in relations may have little effect until a threshold triggers sanctions or supply interruption.

Managers should distinguish country risk from sovereign risk. Country risk includes the broad operating environment, while sovereign risk focuses on the government’s ability and willingness to honour financial obligations. Political risk insurance, joint ventures, local partnerships, contractual protections, and investment staging can reduce exposure, but none eliminates it.

A useful process begins with mapping assets, suppliers, customers, data, personnel, and critical technologies by jurisdiction. The firm can then identify dependencies, construct scenarios, estimate financial and operational consequences, and assign decision rights. Board oversight is especially important where commercial incentives may encourage managers to understate human-rights, corruption, or security risks.

Monetary and Fiscal Policy: Business Effects and Policy Trade-offs

Monetary policy uses interest rates, open-market operations, reserve requirements, communication, and in some systems balance-sheet tools to influence inflation, employment, credit, and financial stability. Expansionary policy tends to reduce borrowing costs and support demand; contractionary policy tends to restrain demand and inflation. The effect depends on transmission through banks, asset markets, exchange rates, expectations, and household balance sheets.

Fiscal policy concerns government spending, taxation, transfers, borrowing, and public investment. Expansionary fiscal policy can support activity during a downturn but may increase public debt, inflationary pressure, or interest rates if the economy is near capacity. Contractionary fiscal policy may improve public finances but weaken demand and employment in the short run. Automatic stabilizers, such as progressive taxes and unemployment benefits, operate without new legislative action.

Policy effects are distributional. A rate increase may protect savers but burden mortgage holders and leveraged enterprises. A subsidy may support strategic industries but distort competition. Tax incentives may stimulate investment but favour firms able to navigate complex rules. Managers should therefore analyze not only the average effect but also timing, sectoral incidence, eligibility, and policy credibility.

An Integrated Decision Framework

A disciplined macroeconomic decision process can be organized into six stages. First, identify the economic variables most connected to the decision: inflation, rates, currency, demand, trade restrictions, or employment. Second, establish the firm’s exposure through revenues, costs, assets, liabilities, and supply chains. Third, develop a small number of coherent scenarios rather than one supposedly precise forecast. Fourth, quantify effects using sensitivity analysis, cash-flow models, stress tests, and real-options reasoning. Fifth, select responses that preserve flexibility, such as staged investment, contractual adjustment mechanisms, and diversified sourcing. Sixth, monitor leading indicators and define trigger points for action.

Real-options reasoning is particularly valuable under uncertainty. Delaying, expanding, abandoning, or switching a project may have option value. A manager should not automatically invest merely because the expected net present value is positive if waiting can generate valuable information. Conversely, excessive delay may allow competitors to secure scarce assets or market positions.

Useful dashboards combine financial indicators with operational indicators. Examples include inflation by input category, customer order cancellations, inventory days, supplier lead-time variability, foreign-currency exposure, interest-rate reset dates, covenant headroom, and scenario-based liquidity. Dashboards should support decisions rather than encourage excessive data collection.

Technology, Analytics, and Artificial Intelligence

Digital systems enable firms to integrate macroeconomic intelligence with enterprise resource planning, treasury management, procurement, and customer data. Automated forecasts can connect commodity prices, exchange rates, shipment data, and sales volumes. Machine-learning models may identify nonlinear patterns, but they remain vulnerable to structural breaks, biased historical data, and false confidence.

Artificial intelligence can assist with scenario generation, contract review, supplier-risk monitoring, and anomaly detection. It should not replace managerial judgment in decisions involving uncertain causal relationships, ethical trade-offs, or politically sensitive information. Model governance requires transparent assumptions, validation, human review, cybersecurity, access controls, and documentation of data provenance. A sophisticated model built on unstable relationships may be less reliable than a simple model with clearly understood limitations.

Illustrative Case: Meridian Medical Devices

Background

Meridian Medical Devices, an illustrative multinational firm, manufactures diagnostic equipment in one country, purchases specialized sensors from suppliers in two other countries, and sells to hospitals through distributors across several markets. Its revenues are partly denominated in euros and dollars, while a substantial share of labour and overhead is denominated in its home currency.

Situation

Inflation raises energy and logistics costs. The central bank increases policy rates, making Meridian’s floating-rate debt more expensive. At the same time, the home currency appreciates against the euro, reducing the home-currency value of European sales. A new export-control regime creates uncertainty about the availability of a sensor supplied by a politically sensitive jurisdiction.

Analysis

A simple forecast would treat these events independently, but Meridian’s exposures interact. Higher rates reduce demand from hospitals facing tighter budgets and lower the present value of a proposed factory expansion. Currency appreciation lowers translated European revenue but reduces the home-currency cost of imported sensors. Export controls create a low-probability, high-impact supply risk. Inflation also increases working-capital needs because inventory and receivables require more financing.

Approach and Strategy

Meridian establishes three scenarios: managed adjustment, prolonged inflation, and supply interruption. It stress-tests liquidity under each scenario and maps the effect on operating margin, debt-service coverage, and project NPV. The company replaces part of its floating-rate debt with fixed-rate financing, uses currency options for a portion of forecast euro receipts, and negotiates index-linked distributor contracts with transparent limits. It qualifies a second sensor supplier in a politically lower-risk location, even though the alternative has a higher unit price. The factory project is staged: engineering work proceeds, but the largest capital commitment is released only after demand and supply conditions improve.

Outcome

The strategy does not eliminate costs. Hedging premiums, supplier qualification, and redundancy reduce short-term profitability. However, Meridian lowers the probability of severe liquidity stress, preserves the ability to expand, and improves its bargaining position with distributors and suppliers.

Learning Points

The case illustrates that resilience often requires accepting a visible cost to reduce a less visible but potentially catastrophic exposure. It also demonstrates why macroeconomic analysis must be integrated with treasury, procurement, operations, marketing, and governance rather than assigned to a single forecasting department.

Risks, Limitations, and Governance Challenges

Macroeconomic forecasts are uncertain because relationships change. A model estimated during stable inflation may fail during a supply shock. Correlation does not establish causation, and aggregate indicators can conceal regional, sectoral, and distributional differences. Forecast consensus may produce complacency when analysts share the same assumptions.

Common managerial mistakes include extrapolating recent trends, confusing nominal and real growth, ignoring second-round effects, treating hedging as speculation, concentrating supply in the cheapest jurisdiction, and evaluating investments with a single discount rate and a single demand forecast. Another error is failing to account for liquidity: a profitable firm can fail if it cannot meet obligations when financing conditions tighten.

Ethical and governance responsibilities include accurate disclosure of material risks, avoidance of market manipulation, compliance with sanctions and trade controls, anti-bribery safeguards, responsible tax conduct, and respect for labour and human rights in global supply chains. Boards should challenge stress tests, review risk appetite, and ensure that executive incentives do not reward short-term gains obtained by concealing long-term exposure.

Current Developments and Emerging Strategic Questions

Several developments are reshaping the macroeconomic environment. Supply-chain regionalization is increasing the importance of political alignment and industrial policy. Energy transition policies are creating new markets while exposing firms to commodity, technology, and regulatory uncertainty. Digital currencies and faster payment systems may alter settlement and cross-border finance, although their institutional and regulatory implications remain unsettled. Climate-related events increasingly affect inflation, insurance costs, infrastructure, and asset valuation.

The strategic question is moving from prediction to preparedness. Firms need capabilities for rapid sensing, cross-functional interpretation, and disciplined response. Competitive advantage may increasingly depend on the ability to redesign networks, financing, products, and contracts as conditions change.

Best Practices for Managers

1. Separate nominal effects from real economic performance.

2. Map macroeconomic exposures to specific cash flows, assets, liabilities, and capabilities.

3. Use several coherent scenarios rather than one point forecast.

4. Combine sensitivity analysis with stress testing and liquidity planning.

5. Match the maturity and currency of financing with operating cash flows where feasible.

6. Treat hedging as risk management governed by clear policies, not as a source of speculative profit.

7. Evaluate total supply-chain cost and disruption exposure, not purchase price alone.

8. Build contractual flexibility through indexation, review clauses, and staged commitments.

9. Integrate geopolitical, regulatory, ethical, and human-rights analysis into country selection.

10. Review assumptions continuously and define measurable triggers for strategic action.

Chapter Summary

Macroeconomic, financial, and global conditions influence every major managerial decision. Inflation affects prices, costs, working capital, real performance, and customer behaviour. Interest rates shape borrowing costs, valuation, capital structure, and investment timing. Exchange rates create transaction, translation, and economic exposure, requiring both operational and financial responses. Business cycles alter demand and the value of flexibility. Trade policy and global value chains generate efficiency opportunities but also create dependence on distant suppliers and jurisdictions. Geopolitical risk can transform a commercial relationship into an operational or compliance crisis. Monetary and fiscal policy affect firms through demand, credit, exchange rates, taxes, spending, and expectations.

Effective management requires an integrated process of exposure mapping, scenario analysis, stress testing, flexible commitment, and continuous monitoring. Forecasts are useful but inherently limited; resilience depends on governance, liquidity, diversified capabilities, ethical conduct, and the ability to respond before risks become crises.

Key Terms

Inflation: A sustained increase in the general price level that reduces the purchasing power of money.

Real variable: An economic quantity adjusted for changes in the price level.

Interest rate: The price paid for using borrowed funds or the return received for lending funds.

Yield curve: The relationship between interest rates and the maturities of debt instruments.

Discount rate: The rate used to convert future cash flows into present value.

Exchange rate: The price of one currency expressed in another currency.

Transaction exposure: The risk arising from contracted foreign-currency cash flows.

Translation exposure: The accounting effect of converting foreign operations into the reporting currency.

Economic exposure: The long-term effect of currency movements on competitiveness and enterprise value.

Business cycle: Fluctuations in aggregate economic activity over time.

Comparative advantage: The ability to produce a good or service at a lower opportunity cost than another producer.

Tariff: A tax imposed on imported goods or services.

Global value chain: The geographically distributed activities involved in producing and delivering a product or service.

Geopolitical risk: The possibility that political events or international conflict will affect economic activity or firm value.

Monetary policy: Central-bank actions affecting money, credit, interest rates, and aggregate demand.

Fiscal policy: Government decisions concerning taxation, spending, transfers, and borrowing.

Natural hedge: An operational arrangement that offsets exposure by matching foreign-currency revenues and costs.

Scenario analysis: Evaluation of outcomes under several coherent descriptions of future conditions.

Real option: The value of managerial flexibility to delay, expand, abandon, or modify an investment.

Liquidity risk: The risk that an organization cannot meet obligations when they fall due.

Review Questions

Short Answer Questions

1. Distinguish between nominal growth and real growth.

2. What are the three principal forms of foreign-exchange exposure?

3. How can higher interest rates affect capital budgeting decisions?

4. Define comparative advantage and explain its relevance to trade.

5. What is meant by a natural hedge?

Long Answer Questions

1. Explain how inflation influences pricing, costs, working capital, and performance measurement.

2. Analyze the channels through which monetary policy affects firms and industries.

3. Discuss the strategic advantages and disadvantages of global value chains.

4. Explain how geopolitical risk can be incorporated into international investment decisions.

5. Evaluate the role of scenario analysis and stress testing in macroeconomic decision-making.

Analytical / Application Questions

1. A firm imports most of its inputs in a foreign currency but sells primarily in its domestic market. Analyze the effects of domestic-currency depreciation and recommend operational and financial responses.

2. A capital project has high fixed costs, a long payback period, and floating-rate debt financing. Assess its vulnerability to inflation, recession, and rising interest rates, and design an appropriate decision framework.

3. A multinational company must choose between a low-cost supplier in a politically unstable country and a higher-cost supplier in a stable country. Develop a total-cost and risk-based evaluation, including possible mitigation strategies.

22. Multiple Choice Questions with Answers

Question 1

A firm reports an 8 percent increase in nominal sales while consumer prices rise by 10 percent. Which interpretation is most appropriate?

A. Real sales increased by approximately 18 percent

B. Real sales increased by approximately 2 percent

C. Real sales declined by approximately 2 percent

D. Inflation has no effect on the interpretation of sales

Correct Answer: C. Real sales declined by approximately 2 percent

Question 2

Why are long-lived capital projects generally sensitive to increases in interest rates?

A. Higher rates increase the number of future cash flows

B. Higher rates reduce the present value of distant future cash flows

C. Higher rates automatically increase project revenues

D. Higher rates eliminate operating risk

Correct Answer: B. Higher rates reduce the present value of distant future cash flows

Question 3

Which exposure concerns the effect of translating a foreign subsidiary’s accounts into the parent company’s reporting currency?

A. Transaction exposure

B. Translation exposure

C. Economic exposure

D. Liquidity exposure

Correct Answer: B. Translation exposure

Question 4

A company matches euro-denominated costs with euro-denominated revenues. This is an example of:

A. A natural hedge

B. A tariff strategy

C. Fiscal expansion

D. Translation accounting

Correct Answer: A. A natural hedge

Question 5

Which action best represents resilience-oriented supply-chain management?

A. Selecting suppliers solely on the basis of lowest unit price

B. Concentrating all production in one politically aligned facility

C. Evaluating total landed cost, disruption probability, and switching difficulty

D. Eliminating all inventory regardless of lead-time variability

Correct Answer: C. Evaluating total landed cost, disruption probability, and switching difficulty

Question 6

A tariff imposed on imported production inputs is most likely to:

A. Reduce the costs of downstream manufacturers automatically

B. Raise input costs for firms using the imported goods

C. Eliminate exchange-rate risk

D. Guarantee higher consumer welfare

Correct Answer: B. Raise input costs for firms using the imported goods

Question 7

Which policy combination is generally contractionary?

A. Lower interest rates and increased government spending

B. Higher interest rates and reduced government spending

C. Lower taxes and increased transfers

D. Higher subsidies and easier credit

Correct Answer: B. Higher interest rates and reduced government spending

Question 8

Why might a firm use an option rather than a forward contract to manage currency exposure?

A. An option provides flexibility to benefit from favourable currency movements

B. An option guarantees a zero-cost hedge

C. An option removes all political risk

D. An option fixes the exchange rate without any premium

Correct Answer: A. An option provides flexibility to benefit from favourable currency movements

Question 9

In the Meridian Medical Devices case, staging the factory investment primarily created:

A. A real option to delay the largest commitment

B. A guarantee against inflation

C. A permanent reduction in supplier costs

D. An elimination of demand uncertainty

Correct Answer: A. A real option to delay the largest commitment

Question 10

Which is a governance weakness in macroeconomic risk management?

A. Using multiple scenarios and trigger points

B. Testing liquidity under adverse conditions

C. Disclosing material risks to stakeholders

D. Relying on one forecast and ignoring structural breaks

Correct Answer: D. Relying on one forecast and ignoring structural breaks