The duration of fixed exchange rate regimes

Figure 4: Estimated hazard functions, by country type, only observed exits

5.3 Semi-parametric estimation

Non-parametric estimations show a non-monotonic pattern of duration dependence that
varies across types of countries. Consequently, we control for country-specific time-varying
explanatory variables by estimating a proportional hazard model. The baseline specifica-
tion (I) includes selected macroeconomic and financial variables, namely inflation, growth,
international reserves, openness, the current account, budget balance and the rate of un-
employment. Other specifications (II) to (VI) test for the robustness of the results arising
from our initial specification by including alternatively capital controls, a banking crisis
index, the degree of financial development, political rights, changes in the real exchange
rate, central bank independence, and a country dummy variable. In the end, we are trying
to explain the time-varying feature of duration dependence and see whether including ex-
planatory variables affects this feature. Table 2 presents the results. We report the number
of observations and the p-value of a chi-squared test for the overall validity of the model.
The null hypothesis that the coefficients are jointly zero is always strongly rejected.

The coefficients for the degree of openness and current account balance are always
negative and significantly different from zero. A greater degree of openness to the rest of
the world and a stronger current account correspond to a reduced probability of an exit.

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