The Duration of the Exchange Rate and Financial Account Regimes: A Multiple Destinations Model Approach∗

This research analyzes the duration of the policy mix comprising an intermediate ex-change rate regime and closed financial account. A multiple destinations model, augmented to incorporate unobserved heterogeneity, is proposed to explore the duration dependence of this policy and investigate the role played by domestic and international factors on the length of the spells. Our analysis is novel because we overcome the potential endogeneity between the two policies by analyzing the duration of the policy mix, allow for multiple destinations and control for unobserved heterogeneity using parametric and semiparametric techniques. The evidence favors the multiple destination model over the single destination version. So the latter hides interesting factors affecting the duration of the policy mix and overestimates the probability of survival. Regarding the probability of moving to a new policy we found that it depends on the elapsed duration. The deepness of the financial system, GDP per capita, size, the general acceptance of capital controls and the interaction between the feasi-bility of an intermediate exchange rate and a dummy variable for emerging markets are the most important determinants of the duration. ∗I am highly indebted to my advisor Barry Eichengreen for his continuous guidance, encouragement, and support. I want also thank Kenneth Train for his comments on this paper and Carmen Reinhart and Nancy Brune for proportionating their data. Financial support from CONACYT and UC-MEXUS is gratefully acknowledged. All errors, however, are my own