Figure 5: Baseline hazard function, proportional hazard model
state which of these two views is correct. One possible extension would be to take account
of unobserved heterogeneity explicitly, so as to control for the effect of omitted variables.
Time would matter whenever the estimated baseline hazard function still remains different
from a horizontal line. We leave this issue for further research.
6 Concluding remarks
This paper studies the conditional probability of an exit from a fixed exchange rate regime.
When we believe that the time spent within a regime is an important determinant of
the probability of exiting this regime, the natural view of exits emphasizes conditional
probabilities instead of unconditional ones and duration models are an appropriate tool.
We use both non-parametric and semi-parametric techniques to obtain estimates of the
hazard functions. The application of the non-parametric Kaplan-Meier estimator uncov-
ers significant non-monotonic patterns of duration dependence that differs across types
of countries. To the extent that duration dependence may be driven by time-varying co-
variates, we also estimate a semi-parametric proportional hazard specification by partial
maximum likelihood. Having controlled for macroeconomic, financial and institutional
variables, we conclude that the pattern of duration dependence remains non-monotonic.
21
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