The duration of fixed exchange rate regimes

The coefficient on the rate of inflation is always positive and almost always significant,
except when an index of central bank independence is included. A greater degree of
governor turnover (less central bank independence) implies an increasing probability of an
exit. The fact that we cannot reject the null hypothesis that the coefficient on inflation is
zero may be attributed to the well-known relationship between inflation and central bank
independence. Economic growth matters weakly in some specifications, while the rate of
growth of international reserves remains insignificant in all specifications. Budget balance
appears to be significant in two models only. The coefficients on the rate of unemployment
is usually significant but carries a surprising negative sign. We would have expected that
a greater rate of unemployment would lead policymakers to adopt a floating exchange rate
regime, thereby reducing the survival of fixed exchange rate regimes.

Our results show that the conditional probability of an exit is not significantly affected
by the presence of capital controls, the occurrence of a banking crisis, the degree of financial
development, the overall quality of institutions within the country and the behaviour of
the real exchange rate. However, we note that most coefficients on these variables carry
the expected sign. For example, the incidence of a banking crisis would correspond to
an increased probability of an exit, other things being equal. In general, the baseline
specification captures most of country heterogeneity. A dummy variable for an emerging
market country is significant at the 10% level only.

Partial likelihood estimation allows for the retrieval of the baseline hazard function.
Figure 5 presents a smoothed version of this function and shows that even after having
controlled for macroeconomic, financial and institutional variables, the shape of the haz-
ard function remains relatively unaffected. It still remains that it increases initially and
then alternates between decreasing and increasing parts. Two different interpretations are
possible. On the one hand, we could argue that time matters per se and that theoretical
models should thus investigate the role of duration as a potential factor affecting optimal
exchange rate policy. On the other hand, one may argue that we have not controlled for
every possible time-varying variable. This alternative view would imply that time may
not matter after all, and that we have simply omitted important covariates. We cannot

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