The duration of fixed exchange rate regimes



4.3 Explanatory variables

The proportional hazard model allows for time-varying explanatory variables. We select
these variables on the basis of empirical studies dealing with the determinants of the onset
of currency crises, and with the factors underlying the optimal choice of an exchange rate
regime
2 . Macroeconomic variables include inflation, economic growth, openness, current
account balance, budget balance, unemployment, the real exchange rate, and a dummy
variable for a banking crisis. Financial variables consist of the rate of growth of interna-
tional reserves and the level of financial development. Finally, institutional factors include
the level of central bank independence, the quality of institutions (proxied by an index of
political rights) and a dummy variable for the presence of capital controls.

The partial likelihood estimation procedure implies that we will use data only at times
of failures. Since our durations are calculated in months, we should use monthly values
of explanatory variables at times of failures. However, we could not collect data at the
monthly frequency for each time-varying covariate. When such data are not available, we
use the value for the year before that which contains the month during which a failure
occurs. This choice is clearly arbitrary. However, it is likely to minimise the possible
endogeneity of macroeconomic and financial variables. An exit represents a significant
change in the structure of the economy and many variables are likely to respond to such a
change.

5 Results

This section presents our results in three steps. We start with some descriptive statistics on
the computed durations and calculate estimates of the hazard function using the Kaplan-
Meier estimator. Finally, we show the estimates of the proportional hazard model.

2We discuss the source and measurement of our variables in the appendix.

13



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