The duration of fixed exchange rate regimes

Figure 1: Estimated hazard function, all countries

significantly longer than those of emerging market economies⁴ .

5.2 Non-parametric estimation

Figure 1 presents the estimated hazard function obtained with the Kaplan-Meier estima-
tor for the full sample. A clear non-monotonic pattern of duration dependence appears.
More precisely, it alternates between increasing and decreasing parts. Therefore, duration
dependence cannot be qualified as being either positive, or negative: it depends upon sur-
vival time. Probit and logit regressions will not be able to capture the effect of duration
on the probability of an exit adequately. Furthermore, it remains difficult to provide for
an interpretation of such duration dependence. It could arise from the fact that credibility
is only gradually achieved after the adoption of a fixed exchange rate regime. The condi-
tional probability of an exit would rise initially. Conditional on survival up to a certain
time threshold, however, this probability would then start declining.

Our descriptive analysis shows that regime durations vary across types of countries.

⁴ Clearly, our summary statistics are computed under the implicit assumption that regimes start in
January 1974 or later, and that they end in December 2001 or before. This is obviously misleading
since some observations are left-truncated and others are right-censored. However, these numbers indicate
some country heterogeneity and overall trends which are useful information for the construction of the
semi-parametric specification.

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