The duration of fixed exchange rate regimes



lel markets. They use a battery of descriptive statistics applied to the behaviour of the
market-determined nominal exchange rate and classify countries according to fourteen cat-
egories on a monthly basis. They consider a five-year window in order to avoid focusing
on short-term spells. The new classification differs significantly from the officially reported
exchange rate arrangements.

We adopt the de facto classification constructed by Reinhart and Rogoff (2004). It is
available at a monthly frequency over a long time period, avoids identifying short spells of
exchange rate stability as regimes, takes account of the fact that countries may have dual or
multiple exchange rates, and/or parallel markets, and is not based on official declarations
but rather on the actions of monetary authorities.

4.2 Definition of exits and durations

The time origin for each duration is defined as the first month during which the classification
shows any type of a fixed exchange rate regime. We define an exit from a fixed to a flexible
exchange rate regime as a shift from any fixed category to managed floating, free floating
or free falling. The sample period extends from January 1974 until December 2001. Each
duration corresponds to the number of months from the time origin until the ending event.
If a regime is still in place by December 2001 we count the number of months until that
date and register the observation as being censored.

This operational definition runs into a problem of left truncation. A number of exchange
rate regimes will start before January 1974. This does not affect the estimations of non-
parametric and semi-parametric specifications. The Kaplan-Meier calculation of the hazard
function makes use of the number of regimes that are eligible to fail, and this number will
capture the fact that these regimes are not at risk of failing (since they all survived) until
they come under observation. The semi-parametric approach uses only observations at
times of failure. The simple fact that a regime is observed in January 1974 means that it
did not fail before. This is true for all regimes observed in January 1974, so none of these
regimes can have failed before that date. Hence, we would not have any observation to
contribute to partial likelihood.

12



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