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Received for publication 11 April 2001.I thank Scott Bennett, Charles Eisenstein, Kenneth Oye, Eric Plutzer, Jim Ray, Thomas Willett, and

two anonymous reviewers for helpful comments and suggestions. I also thank Alex Braithwaite, MonicaLombana, and Manu Krishnakumar for research assistance. An earlier version of the paper was presentedat the Annual Meeting of the American Political Science Association, Washington D. C., 2000. Replica-tion data are available from the author upon request.

Address correspondence to Quan Li, Department of Political Science, Pennsylvania State University,107 Burrowes Building, University Park, PA 16802, USA. E-mail: quanli@psu.edu

International Interactions, 29:159–193, 2003

Copyright © 2003 Taylor & Francis

THE EFFECT OF SECURITY ALLIANCES ON EXCHANGE-RATE REGIME CHOICES

QUAN LI

Assistant Professor, Department of Political Science,The Pennsylvania State University, University Park, PA, USA

Because an exchange-rate arrangement by nature involves more than one countryand because it has various economic and political implications, it is affected inevita-bly by interstate political relations. Most previous research explains the exchange-rate regime choice as a function of individual country attributes, ignoring the role ofinterstate political relations and the anchor-currency choice. In this paper, I exam-ine how security alliances influence a country’s choices over the flexible-fixed re-gime and the anchor currency. Alliances increase the ex ante attractiveness of peg-ging to one’s ally, because security ties can reduce concerns over relative gains,motivate active collaboration by the anchor-currency ally to defend the regime, andsignal to the currency market the durability of the regime. Hence, a country isbiased toward pegging to its ally, relative to either pegging to a nonally or choosingthe flexible regime. I test the argument for both the Bretton Woods and the post-Bretton Woods periods. I find that alliance ties affect both the anchor currency andthe flexible-fixed regime choices, as expected. But these effects appear to functionthrough the defense-pact alliance alone and are most pronounced for the developingcountries.

KEY WORDS: exchange-rate regime choices, security alliance, multinomial logit

The choice of an exchange-rate regime is one of the most important macroeco-nomic policies for a national government. The exchange-rate arrangement affectshow governments manage monetary policy and capital flows. Under the well-knownMundell-Fleming conditions, in an open economy, a government that adopts the fixedregime must choose between capital mobility and monetary policy autonomy; the

tradeoff does not hold under a floating regime. Hence, the two regimes have differ-ent welfare and distributional implications. Furthermore, the exchange-rate arrange-ment affects international monetary relations, involving the exercise of currencypower, various distributional consequences, and cross-border externalities. Mostprevious studies explain the regime choice as a function of various economic andpolitical attributes of a country. However, because an exchange-rate arrangement bynature involves more than one country and because it has various economic andpolitical implications both domestically and internationally, interstate political rela-tions inevitably influence the regime choices.

Should the government adopt a floating regime, allowing the foreign exchangemarket to determine the exchange rate, or the fixed regime under which its currencyis pegged to another? If the fixed regime is preferred, to which country’s currencyshould one peg its own? Decisions over these two issues, both of which influence acountry’s exchange-rate arrangement, are theoretically and statistically interdepen-dent. Yet by treating the regime choice as a single decision based on country charac-teristics alone, most previous research has neither taken into account this interdepen-dence nor addressed the role of interstate political relations. The result is an incom-plete understanding of the causal process. For example, even during the heyday ofthe Bretton Woods system, not all countries adopted the fixed regime, and not allcountries pegged their currencies to the U.S. dollar. National attributes alone cannotfully explain the observed variations in these choices. A causal theory must, there-fore, demonstrate how these two decisions are interdependent and how they are af-fected by international politics.

In this paper, I link international political relations to national exchange-rate ar-rangements. I examine how security alliance relations influence exchange-rate ar-rangements in a context that takes into account decisions over both the flexible-fixedregime and the anchor currency. Alliance ties, which generally correlate positivelywith the quality of political relations, increase the ex ante attractiveness of the fixedregime to both the pegging and the anchor-currency countries. Such security rela-tions can reduce concerns over relative gains, motivate collaborative defense of theexchange rate parity, and enhance the regime’s credibility in the currency market.Hence, all else equal, a country is more likely to peg to its military ally when choos-ing its exchange-rate arrangements. I test this argument on the effects of alliance tiesfor both the Bretton Woods and the post-Bretton Woods periods by applying a con-strained multinomial logit model.

This article is organized as follows. The first section discusses how the flexible-fixed regime choice and the anchor-currency choice are interrelated, while review-ing the relevant literature. The second develops a theoretical argument of how secu-rity alliances affect a country’s exchange-rate arrangement. The third discusses theresearch design for an empirical analysis of alliance effects. Section four presents thestatistical findings. Section five discusses some sensitivity analysis, and the finalsection summarizes the findings and discusses implications.

DUAL CHOICES IN NATIONAL EXCHANGE-RATE ARRANGEMENTS

Most studies of the exchange-rate arrangement treat the problem as a binary choice

160 Q. LI

between the fixed and flexible regimes.1 However, the choice problem for any coun-try i involves more than a single decision. If country i should choose the fixed re-gime, it also has to choose an anchor currency to which it pegs its own.2 Figure 1presents a schematic version of this decision problem. In Figure 1, only the curren-cies of two countries j and k or a basket of their currencies l have the potential toserve as anchor currencies. Now to choose an optimal exchange-rate regime, coun-try i may have to make two decisions instead of one. Each decision is treated inprobabilistic terms due to the influence of random events. For the sake of illustra-tion, country i chooses to fix its exchange rate with probability p

1 or float it with

probability p2. If it favors the fixed regime, i also pegs to j, k, or the currency basketl with probability p

j, p

k, or p

l, respectively.

The addition of an anchor-currency choice has two important implications forexplaining a country’s exchange-rate arrangement. First, one must account for boththe fixed-flexible regime choice and the anchor-currency choice because the twodecisions are correlated. Second, one also has to consider not only the attributes ofdifferent countries but also the relations between country i and countries j and k. Iwill elaborate these two implications below in conjunction with a discussion of pre-vious research.

Most previous studies of the exchange-rate regime choice focus on one of the twodecisions in Figure 1, i.e., the choice between the fixed and flexible regimes. Thebasic economic rationale is from the theory of optimum currency area (OCA). Ac-cording to this theory, an optimum currency area should consist of diversified econo-mies closely linked by trade and have high factor mobility such that the fixedexchange rate system or a currency union is economically optimal for member econo-mies (Mundell, 1961; McKinnon, 1963). Although international monetary econo-mists (e.g., Krugman, 1995; Cooper, 1999) consider the OCA theory inadequate for

161SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

Figure 1. Country i’s Choice of the Exchange Rate Regime.

explaining this important choice problem, a body of econometric work has estab-lished some empirical regularities (e.g., Heller, 1978; Holden et al., 1979; Bosco,1987; Melvin, 1985; Edwards, 1996). The probabilities p

1 and p

2 of choosing the

fixed and flexible regimes, as denoted in Figure 1, are suggested to be a function ofcountry i’s attributes, such as its economic openness, market size, capital mobility,its credibility in inflation control, and its preferences regarding unemployment andinflation. The fixed regime is often found to be associated with countries that aresmall and open to trade, with a low degree of international financial integration, buthave strong preferences for inflation control.

In contrast, political economists explain this choice as the outcome of politics.3

Domestic distributive consequences of the fixed and flexible regimes lead to variousconflicts of interest and contests over exchange-rate policymaking. Such conflictsoccur between the camp of international traders and investors and the camp of im-port-competing producers and nontradable goods producers, or between the tradableand nontradable sectors, or among other competing interests (Frieden, 1991; Hefeker,1997; Gowa, 1983). Party politics and domestic political institutions may also affectthe policy preferences of governments in exchange-rate arrangements (Simmons,1994; Bernhard and Leblang, 1999; Broz, 2002; Leblang, 1999). The existence of ahegemon arguably has a dominant influence over the whole international monetarysystem and consequently the choices states make over exchange-rate regimes(Kindleberger, 1986; Eichengreen, 1992, 1996; Cohen, 1997).

Although these studies offer important insights regarding the choice between thefixed and flexible regimes, they fail to explain why a country that prefers the fixedregime pegs its currency to that of a particular other country. Country i’s attributesper se do not explain its anchor-currency choice. In light of the simple model inFigure 1, explaining the regime choice without accounting for the anchor-currencychoice is conceptually inadequate, a point worth further elaboration below.

On the one hand, the lack of an appropriate anchor currency prevents a countrydesiring the fixed regime from realizing its preference, forcing it to adopt the flexibleregime. Using the terms in Figure 1, the probability of the fixed regime p

1 can be

high (because of country i’s attributes), whereas the probabilities pj, p

k, and p

l may be

low (because of relational factors other than country i’s attributes). In this case, countryi is unlikely to find an appropriate anchor currency (as implied by small p

j, p

k, and

pl), forcing it not to adopt the fixed regime despite its strong preference (as implied

by a high p1). Hence the choice between the flexible and fixed regimes is affected by

the choice of an anchor currency.4 On the other hand, Figure 1 shows that country i’seventual anchor-currency choice is also influenced by the size of probability p

1 or p

2.

If probability p1 is low and p2 is high, country i is less likely to care about the choiceof an anchor currency. Hence, to explain an exchange-rate arrangement, one mustconsider simultaneously the probabilities p

1 and p

2 alongside the probabilities p

j, p

k,

and pl. The related statistical interdependence needs to be dealt with in statistical

estimation, which I shall discuss in detail in the research design section.Conceptualizing the choice of an exchange-rate regime as in Figure 1 suggests

another important implication. The anchor-currency choice necessarily involves in-teractions between country i and country j or k. In addition to country i’s attributes,which affect the fixed-flexible regime choice, and the attributes of countries j and k,

162 Q. LI

which help them attract other countries to peg to their currencies, the ties betweencountry i and country j or k are particularly relevant. The choice among alternativeanchors has distributional implications. For example, some Asian countries are im-bedded in several commodity chains, some linked to an American market and othersto a Japanese one. The choice between the yen and dollar pegs not only affect tradersbut also investors, in terms of the level of transaction costs. Such a choice is inher-ently a function of interstate relations.

Not all analysts ignore this interactive aspect in an exchange-rate arrangement.Cooper (1975) and Hamada (1976) model the choices of alternative monetary re-gimes by two countries (in a two-economy world) as a battle-of-the-sexes game thathas two nonequivalent Nash equilibria. In their analyses of such strategic interac-tions, however, Cooper and Hamada do not consider the problem of choosing ananchor currency, but rather investigate how two countries agree upon a set of mon-etary rules facilitating their economic exchanges.5

The voluminous literature on currency competition and substitution may also berelevant to the anchor-currency choice problem (see, for example, Cohen, 1997, 1998).According to one view, because of the benefits accruing to the country whose cur-rency is widely used internationally, and because of the real danger of a foreigncurrency replacing the currency within a country, national currencies are in constantDarwinian struggle for survival. National currencies that enjoy superior credibility,market confidence, and wide commercial use are more likely to be chosen as anchorcurrencies. Although this argument is clearly relevant to an empirical evaluation ofthe determinants of the anchor-currency choice, it ignores the effects of the specificrelations between the potential pegging and anchor-currency countries.

The theory of optimum currency area (OCA) also touches upon interactions amongcountries, an often-overlooked aspect of the theory. In Mundell’s (1961) initial for-mulation, economic variables are not the only factors viewed as important in shapinga currency area; international cooperation among the central banks within a currencyarea is also deemed essential. More important, when the OCA does not coincide withbut cuts across the political domains of sovereign states, the interference of politicalrelations is most conspicuous.6

Heller (1978) and Moon (1982) are among the few scholars who examine empiri-cally the issue of choosing an anchor currency. They both find that trade relations arean important determinant of the anchor-currency choice. Pertinent to this analysis,Moon (1982) examines how trade dependence affects the choice of the U.S. dollar asan anchor currency. He also addresses the effect of military alliances and finds thatwhen a country is allied with the United States, it is more likely to peg to the U.S.dollar. But his study performs only univariate analyses on pegging to the dollar,without considering other potential anchor-currencies or controlling for the fixed-flexible regime choice. Below, I lay out explicitly the causal mechanisms throughwhich a state’s security alliances affect its exchange-rate arrangements.

SECURITY ALLIANCES, ANCHOR-CURRENCY, AND FIXED-FLEXIBLEREGIME CHOICES

Historically, countries that prefer the fixed regime can usually choose among sev-

163SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

eral competing anchor currencies. Under the Bretton Woods system, the British poundand the French franc were alternatives to the U.S. dollar in terms of serving as anchorcurrencies. After 1973, the list of alternatives expanded for many countries and in-cluded the Australian dollar, the German deutsche mark, the Indian rupee, the Italianlira, the Spanish peseta, the Russian ruble, the South African rand, and even theSingapore dollar.

What are the economic incentives of a country in choosing its anchor currency? Acountry often prefers an anchor currency that offers a stable store of value and awidely accepted medium of exchange. More important, by choosing an anchor cur-rency, a state selects a nominal exchange rate anchor. The motivation is to maintainreal exchange rate stability and a desirable valuation path. Furthermore, peggingalso leads to exchange rate stability that greatly reduces the exchange rate risk, fa-cilitating international trade and investment. However, it happens that for some coun-tries an anchor currency country that is optimal from an economic perspective isunfriendly politically. Such instances have some welfare-reducing implications forboth the anchor-currency choice and the flexible-fixed regime choice. In the end, thecountry may either choose to peg to some basket of currencies or, as discussed in theprevious section, be forced to adopt the flexible regime. In this paper, I argue thatsecurity ties can influence these choices at the margin, helping a country avoid pick-ing a second-best option due to political considerations. Security alliances add to theex ante attractiveness of the fixed regime to both the pegging and the anchor-cur-rency countries. I elaborate the causal mechanism below.

States ally because they intend to adjust power distribution (Waltz, 1979), react tothreats (Walt, 1987), trade off security and autonomy (Morrow, 1991), pursue an op-timal portfolio of security risk and return (Conybeare, 1992), or because they sharesimilar preferences (Bueno de Mesquita, 1981; Smith, 1995; Fearon, 1997). What-ever the reason, military allies have to align their security interests, at least tenta-tively. Moreover, because alliance generates coordination costs and institutionalizedcommitments that enhance its credibility (Morrow, 1994; Fearon, 1997), and becauseallies do honor their commitments most of the time (Leeds, Long, and Mitchell, 2000),alliance ties may strengthen common security interests. Hence, alliance ties frequentlymotivate international monetary cooperation that is essential for the maintenance ofthe fixed exchange-rate regime. Oye (1985) and Kirshner (1995) both provide illus-trative examples of monetary cooperation among allies in their analyses of the Tripar-tite Monetary Agreement among Britain, France, and the United States, as well as thejoint efforts by the United States and Britain in defending the currency of their Chi-nese ally in the late 1930s.7 A country may expect less enmity and more active col-laboration from its anchor-currency ally in defending the exchange parity. All elseequal, it is such an expectation that makes pegging to one’s ally more appealing.8

The anchor-currency country has both economic and political incentives to defendthe pegging of its ally. It can expect to derive positive economic benefits and securityexternalities from the arrangement. Studies of alliance effects on bilateral trade flowsargue that allies tend to trade more with each other because the resulting efficiencygains turn into military resources that benefit allies, generating positive security exter-nalities (Gowa, 1994; Mansfield and Bronson, 1997). This logic is consistent with theargument here regarding pegging between countries. A stable fixed regime signifi-

164 Q. LI

cantly reduces exchange rate risks and hence increases both bilateral trade and invest-ments between the pegging and anchor-currency countries. These economic benefitsin trade and investments can be translated into improved military power for both coun-tries. If such improvement in military power occurs for a pair of potential adversaries,both countries would be concerned about the relative gains. Hence, the pegging coun-try is more likely to refrain from a pegging relationship while the anchor country isless likely to help defend the fixed regime. But, for a pair of security allies, concernsover relative gains are much less significant while relatively compatible security inter-ests motivate them to turn economic gains from pegging into mutually beneficial mili-tary resources. Thus, an alliance relationship can propel one country to peg to its allyanchor while inducing the other country to help defend its pegging ally.

The anchor-currency country can also reap additional positive security externali-ties from the pegging arrangement. Kirshner (1995) offers an illustrative discussionof the British experience. During World War II, Britain experienced declining re-serves. Relying on countries that continued to peg to the British pound, Britain wasable to maintain confidence in its currency and expand its sterling liabilities dramati-cally to support its war efforts.9 The expectation of plausible future support by thepegging country offers an incentive for the anchor-currency country to intervene tomaintain the exchange parity of its ally.

The expectation that good political relations motivate concerted efforts at cur-rency defense has another important implication. As models of currency crises sug-gest, the collapse of the fixed exchange-rate regime results from a loss of credibilityof the government in the eyes of the currency market in terms of the government’swillingness and ability to defend the regime (Krugman, 1979). The loss of credibilityalso can be driven purely by self-fulfilling expectations, just like a bank run can becaused by a rumor (Obstfeld, 1994). Alliance ties, as they inform market observersabout the quality of political relations between two countries, provide a signal to thecurrency market about the willingness of the anchor-currency country to come to theaid of its pegging ally in defending the regime.10 Hence, alliance ties help to stabilizemarket expectations about the durability of the fixed regime. Just as pegging to acountry of low inflation rate enhances one’s own credibility in inflation control, peg-ging to a security ally helps to acquire additional credibility for the fixed regime.

Frequently, a small open economy desiring the fixed regime may have little choiceof to whom to peg except for one or two large countries, such as Britain in the 1930sor the United States after World War II. In such instances, bad political relations withthese large countries may steer the small country away from pegging and toward theflexible regime instead, because pegging provides the anchor-currency country withan additional instrument of statecraft that might be used against the pegging country.Conversely, if the large country is an ally, the small economy does not need to avoidpegging as it expects less future political manipulation. Hence, the absence of alli-ance ties, when reflecting bad political relations, may cause a country favoring thefixed regime to choose the flexible regime instead.

We can, therefore, conclude that a security alliance induces a country to peg to thecurrency of its military ally. However, alliances are heterogeneous and do not em-body the same level of compatible security interests or commitments (Singer andSmall, 1966; Moul, 1988). Some alliance ties may be less likely than others in bring-

165SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

ing about pegging that involves high stakes and strong commitments. A neutralityagreement merely specifies the avoidance of engagement in a coalition aggressivetoward either party of the agreement. An entente pact requires only consultation orcooperation in a time of crisis. In contrast, a defense-pact alliance is much moredemanding, asking for a coalition and coordinated military efforts in terms of thewillingness to help each other militarily. Therefore, defense-pact allies share morecompatible security interests, stronger security commitments to and greater influ-ence over each other and, consequently, can expect of each other more credible andfriendly actions. The greater the commitment, the more important a country is to thepolitical purposes of its anchor-currency ally, the less likely the anchor-currencycountry is to adopt policies that are harmful to the interests of the pegging country,and the more likely it is to make efforts defending the fixed regime. Therefore, if analliance does affect the anchor-currency choice, we should find the effect to be stron-gest between the defense-pact allies, relative to the neutrality or entente pact.

RESEARCH DESIGN

This section discusses the research design for testing the effects of security alli-ances on the dual exchange-rate regime choices. Because the choices are affected bythe interactions between the pegging and anchor-currency countries as well as theirnational attributes, I identify pairs of countries that represent potential pegger-poten-tial anchor dyads. The unit of analysis is the potential pegger-potential anchor dyadyear. The spatial domain includes all pairs consisting of any possible pegging coun-try and its potential anchor-currency countries. For this study, the relevant potentialanchor-currency countries include major financial powers and each possible peg-ging country’s largest trading partners in the past. As a result, the potential anchorcountries include both those that have the potential to serve as anchor countries butnever did so, such as Japan, and all those countries whose currencies have onceserved as the anchors for some other countries, including the U.S., U.K., France,Germany, Japan, Italy, Australia, India, Spain, South Africa, and Singapore. Russiais excluded due to missing data. More specifically, the U.S., U.K., France, and Ger-many are always included in the sample as potential anchors, but Japan, Italy, Aus-tralia, India, Spain, South Africa or Singapore are only included as a potential anchorwhen it has served as the largest trading partner for the potential pegging country ina dyad. This criterion ensures against artificially increasing the sample size and caus-ing spurious findings.11 To examine the robustness of results, I perform separate analy-ses with all countries and then with the non-OECD developing countries alone aspossible pegging countries. The temporal domain includes years from 1966 to 1992,restricted by data availability for exchange-rate regime choices and security alli-ances. Statistical analysis is also performed separately for the Bretton Woods sampleperiod (1966–1973) and the post-Bretton Woods sample period (1974–1992) be-cause the collapse of the Bretton Woods system brought about different exchange-rate regime options, a detail discussed below.

Dependent Variable

The dependent variable measures the anchor-currency and the flexible-fixed re-

166 Q. LI

gime choices. Data on the dependent variable are collected from the InternationalMonetary Fund Annual Reports on Exchange Arrangements and Exchange Controlsand the International Financial Statistics Yearbook.12 The coding categories used bythe IMF changed somewhat over time, most notably after the breakdown of the BrettonWoods system. Separate models are thus estimated for the two periods before andafter 1973.

Between 1966 and 1973, 89 countries ever pegged their currencies to the U.S.dollar, 6 countries to the British pound, 3 to the French franc, and 11 countries evermaintained the flexible exchange-rate regime. (Note that the sum of the number ofcountries can be greater than the total number of countries in a year because coun-tries change their exchange-rate arrangements over time. The same caveat appliesbelow for the post-Bretton Woods period.) For this period, the dependent variable iscoded 1 if a possible pegging country pegs to any potential anchor-currency countryin the dyad in a year, 2 if it has the flexible regime in the year, and 0 otherwise (i.e.,if it has the fixed regime but does not peg to the potential anchor-currency country inthe dyad).

Between 1973 and 1992, the exchange-rate arrangements were more complicated.The IMF provides three broad categories: (1) pegging, (2) limited flexibility, and (3)more flexibility. There are specific types under each category and they also changesomewhat over time, as documented in the IMF publications listed above.

Pegging. For some years in this period, 38 countries ever pegged to the dollar, 8countries to the pound, and 12 countries to the franc. Other currencies also emergedas occasional or long lasting anchors, such as the Australian dollar (2 countries),German deutsche mark (1 country), Indian rupee (1 country), Italian lira (1 country),Spanish peseta (1 country), Russian ruble (5 countries), South African rand (3 coun-tries), and Singapore dollar (1 country). Many countries that desired the fixed re-gime and yet found the existing single anchor currencies unsuitable chose to peg tothe SDR (special drawing rights) basket (22 countries) or some other composite ofcurrencies of their own choice (50 countries).

Limited flexibility. Some countries maintained exchange rates of limited flexibil-ity, either in terms of the U.S. dollar (9 countries) or under the European cooperativeexchange arrangements (9 countries). The European cooperative exchange arrange-ments refer to the cooperative arrangement for multicurrency intervention (the“snake”) for the early years and the European Monetary System for the later years.As many argue (e.g., McKinnon, 1993; Eichengreen, 1996), under these Europeancooperative arrangements, the German deutsche mark served essentially as the an-chor currency.

More flexibility. Three types of the flexible regime were ever used by 64 countriesin this period. In the first type, the exchange rate is adjusted relatively frequentlyaccording to a set of indicators. The second is one of other managed floating. Thethird is one of independent floating.

For the post-Bretton Woods period, the dependent variable is coded 1 if a possiblepegging country pegs to a potential anchor-currency country in the dyad in a year;when the possible pegging country adopts a regime of limited flexibility, it also istreated as pegging to the United States or Germany. Despite being a category of

167SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

limited flexibility, the pegging country still imposes on itself a commitment. Moreimportant, since the category involves specific anchor currencies (i.e., the dollar ordeutsche mark), the effects of alliances should be expected. The dependent variableis coded 2 if the potential pegging country in a dyad has the flexible regime, asdefined by the category of more flexibility. It is coded 0 if the possible peggingcountry has the fixed regime but does not peg to the potential anchor-currency coun-try in the dyad in a year. This includes that the country fixes to the SDR or someother currency composite.

The coding scheme requires some further clarification. First, the flexible regimeis included as a category of the dependent variable because, as noted, the probabilityof choosing the flexible regime affects and is affected by whether a country pegs toany potential anchor. Without including this option, one truncates the sample to onlycountries with the fixed regime and fails to account for the statistical interdepen-dence between the flexible-fixed regime and the anchor-currency choices.

Second, the flexible regime is singled out as a separate category because somefactors (the possible pegging country’s attributes) affect its choice between the fixedand flexible regimes but do not affect its choice among competing anchor curren-cies. Moreover, the effects of alliance ties should be stronger in affecting its choiceamong potential anchor currencies than the flexible-fixed regime choice. But analliance tie should still be relevant to the fixed-flexible regime choice, as it enhancesthe attractiveness of the fixed regime.

Third, it is worth noting that the dependent variable coding for both periods re-duces some wide variety of the exchange-rate arrangement to analytically tractablecategories, especially for the post-Bretton Woods period. As discussed earlier, thespecific types under each of the three general categories have changed somewhatover time in the IMF coding. But the three broad types remain the same over time.For the purpose to assess the effect of security ties on the choices of pegging andfloating, it is appropriate to collapse the categories as above.

Independent Variables

Alliance Variables A dichotomous variable Alliance measures the presence or ab-sence of any type of alliance ties. It equals 1 if a possible pegging country is alliedwith a potential anchor-currency country in the dyad in a year through defense, neu-trality, or entente pacts according to the COW project (Singer and Small, 1968), and0 otherwise. It is expected that a country is more likely to peg to its security ally,relative to pegging to a nonally or selecting the flexible regime.

As discussed earlier, we expect that the effects of alliances should be greater forthe defense-pact alliance and unclear for the neutrality or entente pacts, becauseheterogeneous alliance agreements demand different levels of commitment and onlythe defense-pact alliance requires active military participation and coordination. Toassess this expectation, the variable Alliance is replaced by two other variables in asecond model specification. Defense Pact equals 1 if a possible pegging country hasa defense pact alliance with a potential anchor country in the dyad in a year, and 0otherwise; Entente Neutrality equals 1 if a possible pegging country has a neutralityor entente pact alliance with a potential anchor country in the dyad in a year and 0otherwise. Alliance data are from the EUGene software (Bennett and Stam, 2000).

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Alliance is not the only factor that influences the exchange-rate regime choices.To assess accurately the effects of alliance, I also include a number of control vari-ables based on previous theoretical explanations.

Trade Ties A country’s trade patterns are commonly found to influence its exchange-rate arrangements. Countries with geographically concentrated trade are more likelyto adopt the fixed regime (Heller, 1978; Bosco, 1987; Holden, et al., 1979). Moreimportant, if a country’s trade is concentrated toward one trade partner, the countryought to find it more beneficial and is more likely to peg to that particular partner(Heller, 1978; Moon, 1982). Many countries have large trade volume with othercountries, inducing them to peg to the latter’s currencies. Without controlling fortrade ties, alliance effects will be overestimated. The measure of trade ties followsthat of Heller (1978) and Moon (1982). Bilateral /Total Trade is the percentage ratioof the bilateral trade between a possible pegging country and a potential anchor countryin the dyad over the total trade of the possible pegging country. The stronger thetrade ties are, the more likely a country pegs to its trading partner, and the less likelyit chooses the flexible regime. Data are from the IMF Direction of Trade.

Credibility of Potential Anchor-Currency Country Whether a potential anchor-currency country maintains its credibility in price stability affects whether its cur-rency is or continues to be chosen as an anchor. First, an important benefit of peg-ging is that it brings credibility from the anchor to the pegging country in inflationcontrol—an important economic policy objective (e.g., Willett and Mullen, 1982;Edwards, 1996). If the anchor country is unable to keep inflation low, the credibilitybenefit to the pegging country decreases, reducing the likelihood of the particularanchor to be chosen. Second, the inability of the anchor-currency country to controlinflation hinders market confidence and is likely to induce speculative attacks againstthe fixed regime, forcing its collapse.

Anchor Inflation is the GDP-deflator based inflation rate of the potential anchor-currency country that measures its credibility in inflation control.13 The higher theanchor inflation rate, the less likely another country pegs to this potential anchorcurrency, and the more likely it pegs to another currency or chooses the flexibleregime. Data are from the World Bank’s 1999 World Development Indicators.

Probability of Choosing Fixed Regime Based on Pegger’s Attributes As dis-cussed earlier, the fixed-flexible regime choice and the anchor-currency choice areinterdependent both theoretically and statistically. Hence, to explain a country’s ex-change-rate arrangements, it is important to control for the probability the countryadopts the fixed or flexible regime based on its attributes. Following previous stud-ies, I estimate the probability of choosing the fixed regime relative to the flexibleregime as a function of national economic and political attributes. Specifically, Iestimate a probit model of the choice between the fixed and flexible regimes at thecountry level from 1966 to 1995. The dichotomous dependent variable is coded 1 ifa country chooses the fixed regime in a year and 0 otherwise. The independent vari-ables include market size, economic development, trade openness, inflation differ-ential against the world, economic growth, capital control, and democracy level,following previous empirical work (Heller, 1978; Bosco, 1987; Melvin, 1985;Edwards, 1996; Broz, 2002; Leblang, 1999). Size and democracy are expected to

169SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

reduce the probability of the fixed regime, while economic development, trade open-ness, inflation differential against the world, economic growth, and capital controlare expected to increase the probability of the fixed regime. The linear predictorfrom the probit model is saved and transformed, according to the inverse Mill’s ratioformula,14 into a new variable—the hazard of being selected into the fixed regime(Pegger’s Attributes).15 Details of the variables in the probit and model results areincluded in the appendix.

Policy Inertia Public policies are difficult to change as they are subject to pathdependence and considerable inertia. This applies to exchange-rate arrangements aswell (Leblang, 1999). I use the lagged dependent variable (Prior Choice) to capturepolicy inertia. The lagged dependent variable also controls for the possible effect oftemporal dependence and variables not in the model.

Methodology

Recall that the unit of analysis is the potential pegger-potential anchor dyad year.For any particular observation, the dependent variable is 1 if a country pegs to apotential anchor-currency country in the dyad in a year, 2 if it has the flexible regimein the year, and 0 otherwise (i.e., if it has the fixed regime but does not peg to thepotential anchor-currency country in the dyad in the year). The purpose here is toassess the effect of alliance on the probability that a potential pegging country choosesthe other country in the dyad as its currency anchor, relative to that it chooses theflexible regime or that it chooses the fixed regime but does not pick the other countryin the dyad as the anchor. With this trichotomous dependent variable, I use constrainedmultinomial logit for estimation. The baseline category is that one country fixes itsexchange-rate regime and pegs to the other country in the dyad. The probability ofchoosing the baseline category is compared with two other categories, either that onecountry chooses the flexible regime or that it chooses the fixed regime but does notpeg to the other country in the dyad. A negative (positive) coefficient indicates thatthe independent variable raises (reduces) the probability of choosing the baseline cat-egory. It is worth noting that I expect alliance variables to be negative.

Because the potential pegging country’s attributes only affect its flexible-fixedregime choice and not the anchor-currency choice, the effect of country attributes isconstrained in estimation to only influencing the choice between the flexible regimeand the fixed regime with pegging in the dyad. In other words, it is constrained tohave no effect on the choice between the fixed regime with pegging in the dyad andthe fixed regime without pegging in the dyad.

The data structure is pooled time series cross sectional, where each cross sectionis defined by a dyad between a possible pegging country and a potential anchor-currency country. Models of such data structure are likely to have autocorrelatedand heteroskedastic disturbances. To deal with these potential problems, I estimateHuber/White robust standard errors adjusted for clustering over the dyad. This ro-bust estimator produces consistent standard error estimates in the presence ofheteroskedastic error variance; it is also robust against serial correlation within thedyad (Wiggins, 1999). Furthermore, the lagged dependent variable also soaks uptemporal dependence in the data. Because exchange-rate arrangements may influ-

170 Q. LI

171

Tab

le 1

.1C

onst

rain

ed M

ulti

nom

ial L

ogit

Mod

el o

f Anc

hor-

Cur

renc

y an

d F

ixed

-Fle

xibl

e R

egim

e C

hoic

es, 1

966–

1973

(fix

ed a

nd p

eggi

ng a

s ba

selin

e ca

tego

ry)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed &

No

Fle

xibl

eF

ixed

and

No

Fle

xibl

eF

ixed

and

No

Fle

xibl

eF

ixed

and

No

Fle

xibl

eP

eggi

ngR

egim

eP

eggi

ngR

egim

eP

eggi

ngR

egim

eP

eggi

ngR

egim

e

Alli

ance

-0.7

810*

**-0

.905

4***

-1.0

381*

**-1

.409

9***

(0.2

182)

(0.2

805)

(0.2

555)

(0.4

054)

Def

ense

Pac

t-1

.193

1***

-0.9

658*

**-2

.157

8***

-2.0

117*

**(0

.244

2)(0

.291

0)(0

.351

0)(0

.497

6)E

nten

t Neu

tral

ity-0

.016

2-0

.680

60.

2083

-0.3

189

(0.4

505)

(0.7

301)

(0.6

192)

(0.8

372)

Tra

de T

ies

-0.0

336*

**-0

.037

0***

-0.0

310*

**-0

.036

1***

-0.0

346*

**-0

.042

0***

-0.0

274*

**-0

.036

5***

(0.0

060)

(0.0

131)

(0.0

062)

(0.0

134)

(0.0

062)

(0.0

125)

(0.0

068)

(0.0

132)

Anc

hor

Infl

atio

n0.

1427

***

0.14

34**

*0.

1496

***

0.15

03**

*0.

1202

***

0.12

05**

*0.

1298

***

0.13

00**

*(0

.022

0)(0

.022

2)(0

.022

3)(0

.022

5)(0

.021

8)(0

.022

1)(0

.022

4)(0

.022

7)Pe

gger

’s A

ttrib

utes

-0.0

783*

**-0

.077

3***

-0.0

672*

**-0

.066

6***

(0.0

105)

(0.0

101)

(0.0

099)

(0.0

098)

Prio

r C

hoic

e-2

.767

6***

-0.7

088*

**-2

.706

6***

-0.6

856*

**-2

.662

0***

-0.7

973*

**-2

.543

1***

-0.7

425*

**(0

.184

0)(0

.174

8)(0

.184

6)(0

.176

7)(0

.195

0)(0

.192

5)(0

.192

6)(0

.187

1)C

onst

ant

2.60

71**

*1.

3157

***

2.51

04**

*1.

2254

***

2.77

23**

*1.

5453

***

2.57

37**

*1.

3608

***

(0.1

596)

(0.2

352)

(0.1

596)

(0.2

382)

(0.1

738)

(0.2

490)

(0.1

705)

(0.2

453)

N33

5233

5233

5233

5229

6329

6329

6329

63W

ald

Test

(χ2 )

462

517

405

482

Pseu

do R

20.

380.

390.

380.

39

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

172

Tab

le 1

.2C

onst

rain

ed M

ulti

nom

ial L

ogit

Mod

el o

f Anc

hor-

Cur

renc

y an

d F

ixed

-Fle

xibl

e R

egim

e C

hoic

es, 1

974–

1992

(fix

ed a

nd p

eggi

ng a

s ba

selin

e ca

tego

ry)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 5

Mod

el 6

Mod

el 7

Mod

el 8

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-0.6

005*

*-0

.277

1-1

.081

8***

-0.6

656*

**(0

.294

4)(0

.278

7)(0

.290

3)(0

.278

0)D

efen

se P

act

-0.9

204*

**-0

.410

0*-2

.018

8***

-0.8

723*

**(0

.333

6)(0

.299

1)(0

.367

0)(0

.309

9)E

nten

t Neu

tral

ity0.

4450

0.43

080.

4292

0.21

70(0

.580

7)(0

.610

2)(0

.588

3)(0

.613

4)T

rade

Tie

s-0

.046

7***

-0.0

341*

**-0

.043

4***

-0.0

323*

**-0

.046

4***

-0.0

311*

**-0

.038

8***

-0.0

279*

**(0

.007

0)(0

.007

1)(0

.007

2)(0

.007

3)(0

.007

2)(0

.007

1)(0

.007

5)(0

.007

7)A

ncho

r In

flat

ion

0.02

12**

*0.

0215

***

0.02

03**

*0.

0206

***

0.02

14**

*0.

0216

***

0.02

05**

*0.

0207

***

(0.0

058)

(0.0

058)

(0.0

059)

(0.0

059)

(0.0

055)

(0.0

055)

(0.0

057)

(0.0

057)

Pegg

er’s

Attr

ibut

es-0

.288

2***

-0.2

850*

**-0

.337

3***

-0.3

345*

**(0

.038

2)(0

.038

4)(0

.039

5)(0

.039

7)Pr

ior

Cho

ice

-2.0

635*

**0.

9308

***

-2.0

340*

**0.

9473

***

-2.1

064*

**0.

8489

***

-2.0

404*

**0.

8801

***

(0.1

068)

(0.0

566)

(0.1

072)

(0.0

574)

(0.1

148)

(0.0

586)

(0.1

159)

(0.0

601)

Con

stan

t3.

7233

***

1.33

41**

*3.

6807

***

1.29

60**

*3.

7334

***

1.46

94**

*3.

6344

***

1.39

99**

*(0

.194

1)(0

.229

5)(0

.192

8)(0

.227

3)(0

.198

2)(0

.230

9)(0

.194

0)(0

.225

1)N

1094

510

945

1094

510

945

9967

9967

9967

9967

Wal

d Te

st (

χ2 )94

397

193

210

20Ps

eudo

R2

0.53

0.53

0.52

0.53

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

ence economies and politics of both countries in a dyad, the dependent variable mayaffect the independent variables. Following the conventional practice, I control forthe possible simultaneity bias by lagging all independent variables by one year.

RESULTS

Parameter Estimates for Alliance Variables

Tables 1.1 and 1.2 present the constrained multinomial logit estimates for theBretton Woods and the post-Bretton Woods periods, respectively. Each table includestwo model specifications with alternative alliance variables. Each table also includesresults for two different samples, with all countries or non-OECD developing coun-tries acting as the possible pegging countries. Therefore, each table presents resultsfor four models. Each model produces two sets of estimates reflecting, respectively,the effects of independent variables on the likelihood that a potential pegging coun-try chooses the fixed regime but does not peg to the other country in the dyad relativeto that it pegs to the other country in the dyad, and the effects of those variables onthe likelihood that a potential pegging country chooses the flexible regime relative tothat it pegs to the other country in the dyad. For both choices, the reference categoryis the likelihood that the potential pegging country pegs to the other country in thedyad. Hence, recall that a statistically significant negative (positive) coefficient indi-cates that the independent variable increases (decreases) the probability of peggingin a dyad, relative to either the fixed regime but no pegging or the flexible regimechoice. Since all hypotheses are directional, the one-tail test is applied.

In both tables, the Wald tests for the models are statistically significant at 1 per-cent level. The model goodness of fit, measured by the pseudo R2, appears to bereasonably good across all models as well. Below, I focus on discussing statisticalresults on alliance variables in both tables. The general alliance variable (Alliance) isstatistically significant for both choices in both Models 1 and 3 in Table 1.1. Duringthe Bretton Woods system, a potential pegging country is more likely to peg to thecurrency of its ally when choosing among competing potential anchor currencies; itis also more likely to choose pegging to its ally over the flexible regime. The resultsare similar for the post-Bretton Woods period in Table 1.2, except for the choicebetween pegging and the flexible regime. In Models 5 and 7, a country is still morelikely to peg to its ally than a nonally when choosing among competing potentialanchor currencies. However, alliance now makes it more likely to choose peggingover the flexible regime only within the developing nations sample.

In the alternative model specification, two variables Defense Pact and Entente Neu-trality allow us to distinguish the effects of different alliance types. In Table 1.1, thedefense pact alliance variable is statistically significant for both choices in Models 2and 4. During the Bretton Woods system, a potential pegging country is more likely topeg to its defense-pact ally when choosing among competing potential anchor curren-cies; it is also more likely to choose pegging over the flexible regime due to suchalliance ties. These effects also hold for the developing countries. In the post-BrettonWoods period (Table 1.2), the results for the defense pact alliance variable are consis-tent with those in Table 1.1. In Model 6, a potential pegging country is still more likelyto peg to its defense-pact ally in choosing among competing anchor currencies. The

173SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

174

Tab

le 1

.3Su

bsta

ntiv

e E

ffec

ts o

f D

efen

se-P

act A

llian

ce o

n A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

(Fix

ed a

nd P

eggi

ng a

s B

asel

ine

Cat

egor

y)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

ds:

Bre

tton

Woo

ds P

erio

d (1

966–

1973

)R

elat

ive

to F

ixed

but

No

Pegg

ing

Rel

ativ

e to

Fle

xibl

e R

egim

eN

o D

efen

seD

efen

se∆

in P

rob.

of

Rel

ativ

eN

o D

efen

seD

efen

se∆

in P

rob.

ofR

elat

ive

Pact

Pact

Pegg

ing

Ris

kPa

ctPa

ctPe

ggin

gR

isk

Pro

babi

lity

of P

eggi

ng0.

0356

0.10

86+0

.073

3.05

0.89

240.

9647

+0.0

723

1.08

Dev

elop

ing

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

ds:

Bre

tton

Woo

ds P

erio

d (1

966–

1973

)R

elat

ive

to F

ixed

but

No

Pegg

ing

Rel

ativ

e to

Fle

xibl

e R

egim

eN

o D

efen

seD

efen

se∆

in P

rob.

of

Rel

ativ

eN

o D

efen

seD

efen

se∆

in P

rob.

ofR

elat

ive

Pact

Pact

Pegg

ing

Ris

kPa

ctPa

ctPe

ggin

gR

isk

Pro

babi

lity

of P

eggi

ng0.

0359

0.24

37+0

.207

86.

790.

8576

0.98

12+0

.123

61.

14

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

ds:

Pos

t B

rett

on W

oods

Per

iod

(197

4–19

92)

Rel

ativ

e to

Fix

ed b

ut N

o Pe

ggin

gR

elat

ive

to F

lexi

ble

Reg

ime

No

Def

ense

Def

ense

∆ in

Pro

b. o

fR

elat

ive

No

Def

ense

Def

ense

∆ in

Pro

b.of

Rel

ativ

ePa

ctPa

ctPe

ggin

gR

isk

Pact

Pact

Pegg

ing

Ris

kP

roba

bilit

y of

Peg

ging

0.02

270.

0541

+0.0

314

2.38

0.09

60.

1416

+0.0

456

1.48

Dev

elop

ing

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

ds:

Pos

t B

rett

on W

oods

Per

iod

(197

4–19

92)

Rel

ativ

e to

Fix

ed b

ut N

o Pe

ggin

gR

elat

ive

to F

lexi

ble

Reg

ime

No

Def

ense

Def

ense

∆ in

Pro

b. o

fR

elat

ive

No

Def

ense

Def

ense

∆ in

Pro

b.of

Rel

ativ

ePa

ctPa

ctPe

ggin

gR

isk

Pact

Pact

Pegg

ing

Ris

kP

roba

bilit

y of

Peg

ging

0.02

240.

1412

+0.1

178

6.30

0.11

730.

2537

+0.1

364

2.16

defense-pact alliance also affects the choice between pegging and the flexible regime.As Model 8 indicates, these effects also hold for the developing countries.

Entente Neutrality is not statistically significant in either table, for either the BrettonWoods or the post-Bretton Woods period, for either all the potential pegging coun-tries or the developing potential pegging countries alone. An alliance of entente orneutrality pact does not increase the probability that a country pegs to such an ally,either relative to the choice among competing anchor currencies or the choice be-tween the flexible and fixed regimes. In general, alliance ties affect both the choiceof anchor currency and that between the flexible and fixed regimes. Moreover, itseffect appears to function through the defense-pact alliance only. The effects alsohold for the developing countries.

Substantive Significance of Defense-Pact Alliance Effect

Even though the defense-pact alliance variable is statistically significant in vari-ous models, its parameter estimates are effects on the log odds of the dependentvariable at a certain outcome category. They do not provide an intuitive representa-tion of the substantive significance of this variable. Based on the parameter esti-mates and various scenarios in Tables 1.1 and 1.2, Table 1.3 illustrates the size ofeffect of the defense pact alliance on the probability that a potential pegging countrypegs to the currency of the other country in a dyad, relative to the probability that itfixes but does not peg to the other country in the dyad, or relative to the probabilitythat the potential pegging country chooses the flexible regime. In computing theprobability that the dependent variable takes on a value of 1 (that is, one countrypegs to the other in the dyad), the continuous independent variables are held constantat their mean level. The lagged dependent variable takes on a value of 0 (that is, onecountry holds the fixed regime but does not peg to the other in the dyad) while com-paring the probability of fixed with pegging in the dyad relative to fixed withoutpegging; it takes on a value of 2 (that is, the potential pegging country in a dyad hasthe flexible regime) while comparing the probability of fixed with pegging relativeto the flexible regime. The defense pact alliance variable varies from 0 (no suchalliance tie between two countries in a dyad) to 1 (such alliance tie exists). Hence,Table 1.3 includes the probability of pegging by a country to the currency of theother in a dyad relative to the probability that it fixes but does not peg to the othercountry in the dyad or relative to the probability that it adopts the flexible regime,with alliance and without alliance, the change in the probability of pegging withoutalliance to with alliance, and the relative risk between these two alliance scenarios.Here the relative risk refers to the probability of pegging to one’s defense pact ally ina dyad divided by the probability of pegging to a nonally in the dyad. This statistic isespecially useful when the size of the absolute probability is small. Hence, our dis-cussion focuses on the relative risk scores under various scenarios.

As Table 1.3 shows in the first four columns in terms of the choice between peg-ging and fixed but no pegging, during the Bretton Woods period and for the wholesample, a potential pegging country is about three times more likely to peg to theother country in the dyad when they have a defense pact alliance than when they donot have such a tie (given a relative risk score of 3.05). In contrast, a developingpotential pegging country is close to seven times more likely to peg to the other

175SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

country in the dyad, in the presence of such an alliance than in its absence. Thesepatterns remain similar in the post-Bretton Woods period. The relative risk scores are2.38 and 6.30 for all potential pegging countries and the developing pegging coun-tries, respectively.

As Table 1.3 shows in the last four columns (contrasting pegging and the flexibleregime), during the Bretton Woods period and for the whole sample, a potential peg-ging country is only slightly more likely to peg to the other country when they sharea defense pact alliance in the dyad than when they do not (given a relative risk score1.08). The security tie has only a slightly larger effect for the developing potentialpegging country (given a relative risk score 1.14). Such effect, however, is notice-ably larger in the post-Bretton Woods period, particularly so for the developing coun-tries. A developing potential pegging country is more than twice as likely to peg tothe other country in the dyad when they share a defense pact alliance in the dyad thanwhen they do not (given a risk score of 2.16).

In summary, the substantive effect of the defense pact alliance on pegging is quitelarge, relative to the scenario that one country has the fixed regime but does not pegto the other country in the dyad. In contrast, relative to the scenario of the potentialpegging country adopting the flexible regime, the effect of the defense pact allianceon pegging is substantively small in the Bretton Woods period, but appears to begrowing in the post-Bretton Woods period. It is also worth noting that these effectsare much more pronounced for the developing countries.

Parameter Estimates for Control Variables

The control variables in Tables 1.1 and 1.2 also produce some interesting find-ings. Trade ties (Bilateral/Total Trade) are in the expected direction and statisticallysignificant in all models. That is, for both the all country sample and the developingcountry sample, and for both periods, trade ties increase the probability that a coun-try pegs to the currency of its close trade partner, either in the choice among compet-ing anchor currencies or in choosing between pegging and the flexible regime. Thisfinding is consistent with those of Heller (1978) and Moon (1982).

The credibility of the anchor currency country over price stability (Anchor Infla-tion) is statistically significant in all models for both periods (in both Tables 1.1 and1.2) and in the expected direction. Both during and after the Bretton Woods system,high (or low) inflation of a potential anchor-currency country reduces (or raises) theprobability that its currency is used as an anchor, and raises (or reduces) the prob-ability that a potential pegging country adopts the flexible regime. These effectsremain robust for the developing countries.

As expected, the probability that a potential pegging country chooses the fixedregime over the flexible regime based on its attributes (Pegger’s Attributes) has astatistically significant effect over the choice between pegging and the flexible re-gime. For both the Bretton Woods and the post-Bretton Woods periods (in both Tables1.1 and 1.2), the more a country prefers the fixed regime (based on its various na-tional attributes), the less likely it chooses the flexible regime, or vice versa. Theeffects remain robust for the sample of developing countries.

Policy inertia (Prior Choice) is statistically significant in all models in both Tables1.1 and 1.2, with interesting variations. Consistent across all models for both periods

176 Q. LI

(both tables), a country that has already pegged to an anchor currency is likely tocontinue to do so, relative to the possibility that it chooses the fixed regime but doesnot peg to the other country in the dyad. However, in terms of the likelihood that apotential pegging country chooses the flexible regime relative to the choice of peg-ging to the other country in the dyad, the negative coefficients in Table 1.1 and thepositive coefficients in Table 1.2 suggest that countries are more likely to continuewith the fixed regime instead of the flexible regime under the Bretton Woods, butthey are more likely to stick to the flexible regime in the post-Bretton Woods period.These findings suggest that models, without controlling for such path dependence,are likely to be under-specified and that the breakdown of the Bretton Woods marksa system-wide shift in the nature of policy inertia.

SENSITIVITY ANALYSIS

In this section, I evaluate the robustness of the results in Tables 1.1 and 1.2 underseveral scenarios: excluding the prior choice variable and controlling for the regionaleffect, the Cold War, the U.S. effect, or colonial ties between countries. These sce-narios arguably may affect the results of alliance variables in Tables 1.1 and 1.2, hencedeserving some sensitivity analysis. Again, models are estimated for both all potentialpegging countries and just the developing ones, for the Bretton Woods and post-BrettonWoods periods. To save space, the statistical results are presented in the Appendix forreference. For the purpose of this paper, I focus on the effect of the defense pact vari-able in the Appendix tables. As an aside, the effects of other control variables in therobustness tests remain broadly consistent with those in Tables 1.1 and 1.2.

In Appendix Tables 2.1 and 2.2, the prior choice variable, measured by the laggeddependent variable, is excluded. Because the prior regime choice is relevant theo-retically, its exclusion can lead to exaggerated effects of other variables. But its in-clusion may leave less variance for other variables to explain and thus, is worthexamination. Results for the defense pact alliance in these appendix tables remainthe same in terms of hypothesis testing as those in Tables 1.1 and 1.2. The effects aregenerally larger in magnitude without including the lagged dependent variable.

In Appendix Tables 3.1 and 3.2, the regional effect, measured by the number ofcountries with the flexible regime in the relevant region, is included. I assess whetherit affects the results of the defense pact variable. As the Appendix tables show, whilethe regional effect variable is statistically significant and positive, the hypothesistesting results for the defense pact variable remain identical to those in Tables 1.1and 1.2, except for the choice between pegging and the flexible regime for all coun-tries in the post-Bretton Woods period.

In Appendix Table 4.1, a dummy variable for the Cold War is included in themodels for the post-Bretton Woods period. The end of the Cold War led to a system-wide shift in the power distribution in international politics, potentially affectingalliance patterns. As the results in Appendix Table 4.1 show, the defense pact allianceremains quite robust in hypothesis testing, except for the choice between peggingand the flexible regime for all countries. In fact, comparing the magnitudes of thevariable with those in Table 1.2, the inclusion of the Cold War dummy actually ren-ders the estimates of the defense pact alliance larger. Hence, the effect of the defense

177SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

pact alliance in Table 1.2 is not an artifact of the Cold War. In Appendix Tables 5.1 and 5.2, a U.S. dummy, coded one for any dyad that

involves the United States and zero otherwise, is included. The United States was atthe center of both the Bretton Woods system and a network of international alliancesduring the first period. After the Bretton Woods system, the U.S. continued to oc-cupy an extremely influential position in the international monetary system. Onemight argue that the results for the defense pact variable could be an artifact of thedominant influence of the U.S. and its alliance patterns. On the other hand, the inclu-sion of the U.S. dummy actually reduces the scope of the question, as our interest isto detect the effect of alliance ties of all countries, including those of the UnitedStates. Hence, this robustness test of the defense pact alliance to the U.S. influenceis quite strong. As the appendix tables show, the U.S. dummy is statistically signifi-cant and negative for all models. As we expect, the results for the defense pactalliance appear weaker than those in Tables 1.1 and 1.2 in terms of hypothesis test-ing, but they remain broadly consistent with those in Tables 1.1 and 1.2 except forthe choice between pegging and the flexible regime for all countries only.

In Appendix Tables 6.1 and 6.2, the colonial ties between the potential anchor andthe potential pegging countries are controlled for, as one may argue that a formercolony may be more likely to peg to its former colonizer(s) given special their eco-nomic ties. The variable is coding as 1 if a colonial tie ever existed between twocountries in a dyad in the samples. Data are from Hensel (1999). As the Appendixtables show, the colonial ties variable is statistically significant and positive for allmodels in both tables. Given colonial experience, a country is actually less likely topeg to its former colonizer and more likely to adopt the floating regime. This isconsistent with the fact that colonies often fight wars with their colonizers, generat-ing enmity. The hypothesis testing results for the defense pact variable remain con-sistent with those in Tables 1.1 and 1.2, except for the choice between pegging andthe flexible regime for all countries in the post-Bretton Woods period.

In sum, the only statistically insignificant result for the defense pact alliance vari-able in the analyses above is its effect on the choice between pegging and the flexibleregime for all countries only. This result is consistent with the insignificant substan-tive effect of the defense pact alliance variable in Tables 1.1 and 1.2 over the choicebetween pegging and the flexible regime for all countries. (Recall the small relativerisk scores 1.08 and 1.14 for the two periods in Table 1.3, discussed in the previoussection). Overall, the sensitivity analysis indicates that results in Tables 1.1 and 1.2are robust.16

CONCLUSION

The premise of the paper is that an exchange-rate arrangement by nature involvesmore than one country and has economic and political implications. Hence, two is-sues arise. First, an exchange-rate regime may concern two choices—the decisionbetween the flexible and fixed regimes and the decision over the anchor currency.Second, although these two choices are fundamentally motivated by economic con-siderations, international politics also plays a role. In an effort to explore the linkagebetween international politics and international economics, I examine how security

178 Q. LI

alliances affect the dual choices in an exchange-rate arrangement. Alliance ties in-crease the ex ante attractiveness of pegging to one’s ally, because security ties reduceconcerns over relative gains, motivate active collaboration on the part of the anchor-currency ally to defend the fixed regime, and provide a signal to the currency marketabout the durability of the exchange parity. Hence, a country is biased toward peg-ging to its ally, relative to either pegging to a nonally or choosing the flexible regime.Heterogeneity in the level of commitment and compatibility of interests between al-lies further leads to the expectation that the defense pact alliance should have a largereffect over these exchange regime choices than the neutrality and entente alliances.

The argument is tested in empirical analyses for both the Bretton Woods and post-Bretton Woods periods, for all potential pegging countries and the developing onesalone. The empirical test is limited to the period till 1992 due to the availability ofalliance data, hence missing the controversy over the fixed-flexible regime choice inmuch of the 1990s. Some argue that a whole different dynamic seems to be at worksince 1992 and that capital flows of the 1990s have transformed the choices of na-tions. While future tests should expand the temporal domain, there is no clear reasonwhy my findings about the effects of alliance should weaken or disappear. I believethat the patterns I find are robust since international politics still has a tremendousimpact over international economics even in the new digital economy.

The findings suggest that the defense-pact alliance shifts the potential peggingcountry toward choosing the fixed regime over the flexible regime and toward peg-ging to the currency of its ally rather than that of a nonally. These effects are strongerfor the developing potential pegging countries. In contrast, entente or neutrality pactalliances have no statistically significant effects over a country’s exchange-rate ar-rangements. These findings stand up to various statistical controls and alternativemodel specifications.

The uncovering of the defense-pact alliance effects results from a new con-ceptualization of a country’s exchange-rate regime choice and from the use of appro-priate statistical techniques. In this new conceptualization, the exchange-rate regimechoice consists of two interdependent decisions: the choice between the flexible andfixed regimes and the choice over the anchor currency. The inclusion of the anchorcurrency choice explicitly points to the relevance of interstate political relations, pro-ducing a model and findings beyond the pegging country’s attributes alone. The em-pirical analyses are consistent with this conceptualization of interdependent decisions.The constrained multinomial logit model generates a nuance estimation of differenti-ated effects with respect to the two decisions. Without the conceptualization of twointerdependent decisions, security alliances would appear irrelevant to a country’sexchange-rate arrangement, as implied by the country attributes-based models.

Although the defense pact alliance effects are shown to be statistically significantand substantively important for the exchange-rate arrangement in this analysis, willthey remain relevant when economic globalization continues to progress rapidly? Atleast two consequences of economic globalization may affect how international poli-tics interacts with international economics. First, accompanying the growing inte-gration of goods and capital markets is the possibility of currency union, such as theEuropean Monetary Union (EMU), that unifies interstate exchange-rate arrangementsthrough a single currency. Participation in a monetary union makes the choice over

179SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

180 Q. LI

exchange-rate arrangements a nonissue. Second, because globalization gives salienceto economic issues and facilitates the reduction of military conflict, security con-cerns may matter less today than during the Cold War and, consequently, relatedexchange rate manipulations may also become rarer. Declining security concernsmay lead a country to become a less responsive ally in economic affairs, reducing thebenefits of pegging to the ally.

Although these two scenarios appear to be plausible and could potentially weakenthe alliance effects over exchange-rate regime choices, both the prospect and historyof economic globalization suggest caution. Monetary integration is still limited to asmall number of countries. As long as these states are not integrated politically, alli-ance ties among them affect the sustainability of the monetary union. In addition,monetary union, as an extremely strong form of interstate cooperation, is unlikely tospread throughout an anarchical international system of sovereign states. Finally,history tells us that the trend of economic globalization is not irreversible. In manyways, current economic globalization resembles the nineteenth century trade expan-sion and capital market integration, but that first wave of globalization was laterdisrupted by two world wars and a global economic depression. Until internationalpolitics abandons the organizing principle of an anarchical system of sovereign states,security relations between countries will remain relevant to international economics.

NOTES

1. A few studies (e.g., Melvin, 1985; Bernhard and Leblang, 1999) treat the problem as a trichotomouschoice empirically. It is worth noting that treating the exchange-rate regime choice as a binary prob-lem greatly reduces the wide variety of exchange-rate arrangements. For example, the fixed regimecan cover a lot of quite different arrangements, with some larger or smaller intervention band, explicitor discretionary intervention criteria, with or without a currency board or a formal relationship be-tween the anchor and member currencies. Similarly, the flexible regime may also have various alter-native arrangements. The simplifying assumption of a binary choice between the flexible and fixedregimes, which is adopted in most previous studies as well as partly in this analysis, renders thecomplex problem analytically tractable.

2. In fact the problem can be further complicated, as discussed in note 1. For the purpose of this analysis,however, further complication is not necessary.

3. See Cohen (1998) and Eichengreen (1995) for reviews on the effects of politics.4. New Zealand is a useful illustration. Like other small open economies, New Zealand preferred the

fixed regime. However, its trade was divided almost equally among three major trading partners thatwere also its potential anchor-currency countries (the U.S., U.K., and Australia). The trade advantageof fixing to a particular currency appeared low, and New Zealand eventually chose the flexible re-gime. I thank Thomas Willett for suggesting this example.

5. Applying the battle of sexes game helps to illustrate that the regime choice concerns problems ininternational cooperation. However, the simply game does not offer an analytical solution to the re-gime choice problem itself because both Cooper and Hamada do not consider a structural model ofeconomic behavioral relations in the simple 2x2 game. Moreover, as Cooper (1975, 1999) points out,a comprehensive game theoretic analysis of negotiations over international monetary system facesinsurmountable difficulties because of disagreements over distribution of gains, differences in prefer-ences, and differences in contextual conditions.

6. Focusing on the European monetary cooperation, many recent studies (e.g., Eichengreen and Frieden1994; Sandholtz, 1993) examine why the European countries gave up their autonomy in favor of amonetary union. The EMU case resembles, but is more demanding than, choosing an anchor currency.In addition, the empirical scope of EMU is much more limited than that in this analysis.

181SECURITY ALLIANCES AND EXCHANGE-RATE REGIME CHOICES

7. As Kirshner (1995, pp. 61–62) paraphrased an economist’s opinion, “Allied support of the Chinesecurrency, first through silver purchases and then through direct exchange stabilization support, was‘invaluable.’ Without such support, the Chinese currency would have collapsed, and China wouldhave probably been knocked out of the war before Pearl Harbor.” See Kirshner (1995) for details onthis and other cases.

8. It is worth noting that the choices over a country’s exchange-rate regime are typically within thejurisdiction of the government rather than the (independent) central bank (Henning, 1994), furtherfacilitating the linkage between security and economic issues.

9. From 1938 to 1948, Britain’s gold and dollar reserves dropped from 864 million pounds to 369 mil-lion pounds while its sterling liabilities expanded from 760 million pounds to 2,700 million pounds(Kirshner, 1995, p. 144). Britain was able to expand its sterling liabilities for war financing in thepresence of declining reserves because the pegging countries supported by holding British currencyand sterling securities.

10. Sobel (1999) makes a similar information argument that property rights and democratic institutionsreduce uncertainty and inform the international capital market about the equilibrium path of a country’seconomy.

11. Australia, India, Spain, Italy, South Africa, and Singapore as potential anchors count only 8.5 percentof the post-Bretton Woods sample and about 7 percent of the Bretton Woods sample.

12. The IMF coding scheme sometimes generates differences between the self reported choice and the defacto practice. The IMF has noticed this weakness and reported since 1998 or 1999 “corrected” datathat recognizes the difference between the self-reported de jure exchange regimes of nations and thede facto choices they have made (as reflected in variation in actual exchange rates and reserves).Some preliminary alternative data have been used in some studies. See, for example, Levy-Yeyati andSturzenegger (2002). While such measurement errors may be random and do not affect the estimates,future analysis based on alternative data coding is desirable for robustness check.

13. I also examine the effect of an alternative measure, the inflation rate differential between the potentialanchor-currency country and the possible pegging country in a dyad. Nations would choose as anchora country with a similar level of inflation in order to reduce the need for foreign exchange interventionbecause nominal movements mirror real movements when inflation rates are similar. The statisticalresults for alliance variables remain robust. For robustness check, I also examined another alternativemeasure: the inflation differential between the potential anchor-currency country and the world aver-age. The inferences remain unchanged. Heller (1978) uses a similar measure in his analysis.

14. Estimation is conducted using STATA7. The Mills ratio formula is mills = exp(-0.5*phat2)/(sqrt(2*_pi)*normprob(phat)), where phat is the linear preditor from the probit model. See: http://www.stata.com/support/faqs/stat/mills.html for details.

15. This corresponds to the two-step Heckman (1979) selection model. For an example of applications ofthe Heckman selection model in international relations, see Reed (2000).

16. A further robustness test is to estimate the models based on samples with the U.S. as the only potentialanchor. Statistical results from this test turn out to be consistent with those in Tables 1.1 and 1.2.While selecting the United States as the only potential anchor rules out possible spurious findings dueto the selection of potential anchors, the test is narrow and inferences are simply not generalizable.

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CONTRIBUTOR

Quan Li is an Assistant Professor of Political Science at the Pennsylvania State Uni-versity, University Park. His research appears in International Organization, Interna-tional Studies Quarterly, Journal of Politics, British Journal of Political Science, Com-parative Political Studies, Journal of Peace Research, Political Research Quarterly,and elsewhere.

184 Q. LI

Appendix: Probit Estimates of Determinants of Fixed Regime ChoiceBased on Country Attributes

(A Country-Level Analysis, 1966–1995)

Parameter Estimates Robust Standard Errors

Size -0.2805*** (0.0004)Economic Development 0.0001** (0.0316)Trade Openness 0.0025 (0.4509)Inflation Credibility -0.0001 (0.2020)Economic Growth Rate -0.0039 (0.6498)Capital Control 0.3067 (0.1728)Democracy Level -0.0430*** (0.0001)Constant 6.6673*** (0.0000)Pseudo R2 0.28Observations 2,485

• Yearly dummy variables not reported.• significant at 10%; ** significant at 5%; *** significant at 1%.

Variable Description and Data Sources:• Size: Real GDP (PPP), Penn World Table Mark 5.6.• Economic Development: Real GDP (PPP) Per Capita, Penn World Table Mark 5.6.• (Exports+Imports)/GDP, 1999 World Development Indicators.• Inflation Differential (against world average), computed using GDP deflator-based inflation rates

from 1999 World Development Indicators.• Economic Growth Rate: Annual percentage Change in Real GDP PPP, 1999 World Development

Indicators.• Capital Control: capital account restrictions dummy, IMF Annual Reports on Exchange

Arrangements and Controls.• Democracy Level: Democracy score–autocracy score, Polity III.

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Wal

d Te

st (

χ2 )16

319

714

319

8Ps

eudo

R2

0.18

0.19

0.19

0.22

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

185

App

endi

x T

able

2.2

Con

stra

ined

Mul

tino

mia

l Log

it M

odel

of A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

, 197

4–19

92(F

ixed

and

Peg

ging

as

Bas

elin

e C

ateg

ory;

Pri

or C

hoic

e E

xclu

ded

from

Mod

el)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-1.0

306*

**-0

.296

4-1

.445

6***

-0.6

331*

*(0

.294

0)(0

.287

3)(0

.298

6)(0

.289

1)D

efen

se P

act

-1.5

474*

**-0

.477

2*-2

.701

1***

-0.8

686*

**(0

.340

4)(0

.309

2)(0

.416

7)(0

.316

7)E

nten

t Neu

tral

ity0.

4686

0.61

620.

4343

0.43

91(0

.626

7)(0

.650

2)(0

.631

0)(0

.654

8)T

rade

Tie

s-0

.055

8***

-0.0

288*

**-0

.050

0***

-0.0

260*

**-0

.056

7***

-0.0

266*

**-0

.045

6***

-0.0

221*

**(0

.008

4)(0

.006

9)(0

.008

5)(0

.007

2)(0

.008

6)(0

.006

7)(0

.009

1)(0

.007

2)A

ncho

r In

flat

ion

0.02

42**

*0.

0239

***

0.02

22**

*0.

0219

***

0.02

48**

*0.

0246

***

0.02

27**

*0.

0225

***

(0.0

060)

(0.0

060)

(0.0

060)

(0.0

061)

(0.0

057)

(0.0

058)

(0.0

060)

(0.0

061)

Pegg

er’s

Attr

ibut

es-0

.457

1***

-0.4

404*

**-0

.499

6***

-0.4

792*

**(0

.058

6)(0

.058

5)(0

.057

4)(0

.056

4)C

onst

ant

3.07

21**

*2.

9328

***

3.02

83**

*2.

8705

***

3.05

89**

*2.

9312

***

2.96

57**

*2.

8312

***

(0.2

262)

(0.2

538)

(0.2

234)

(0.2

497)

(0.2

318)

(0.2

574)

(0.2

265)

(0.2

505)

N11

017

1101

711

017

1101

710

039

1003

910

039

1003

9W

ald

Test

(χ2 )

141

155

148

190

Pseu

do R

20.

140.

140.

150.

16

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

186

187

App

endi

x T

able

3.1

Con

stra

ined

Mul

tino

mia

l Log

it M

odel

of A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

, 196

6–19

73(F

ixed

and

Peg

ging

as

Bas

elin

e C

ateg

ory;

Reg

iona

l Eff

ect

Incl

uded

in M

odel

)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-0.9

145*

**-1

.091

0***

-1.2

161*

**-1

.627

7***

(0.2

238)

(0.3

018)

(0.2

631)

(0.4

331)

Def

ense

Pac

t-1

.298

0***

-1.1

653*

**-2

.491

8***

-2.4

345*

**(0

.250

1)(0

.309

9)(0

.399

0)(0

.523

0)E

nten

t Neu

tral

ity-0

.190

1-0

.820

00.

0795

-0.4

190

(0.4

788)

(0.7

805)

(0.6

522)

(0.8

953)

Tra

de T

ies

-0.0

336*

**-0

.039

1***

-0.0

311*

**-0

.038

3***

-0.0

344*

**-0

.043

9***

-0.0

262*

**-0

.037

4***

(0.0

064)

(0.0

144)

(0.0

065)

(0.0

148)

(0.0

063)

(0.0

133)

(0.0

069)

(0.0

144)

Anc

hor

Infl

atio

n0.

0995

***

0.10

03**

*0.

1054

***

0.10

62**

*0.

0862

***

0.08

66**

*0.

0920

***

0.09

24**

*(0

.021

2)(0

.021

4)(0

.021

7)(0

.021

9)(0

.019

9)(0

.020

2)(0

.021

3)(0

.021

6)Pe

gger

’s A

ttrib

utes

-0.0

735*

**-0

.072

7***

-0.0

647*

**-0

.064

3***

(0.0

091)

(0.0

088)

(0.0

084)

(0.0

084)

Reg

iona

l Eff

ect

0.41

24**

*0.

3518

***

0.40

78**

*0.

3479

***

0.33

96**

*0.

2838

***

0.37

53**

*0.

3146

***

(0.0

791)

(0.0

972)

(0.0

789)

(0.0

963)

(0.0

800)

(0.1

059)

(0.0

856)

(0.1

094)

Prio

r C

hoic

e-3

.174

5***

-1.2

846*

**-3

.114

4***

-1.2

515*

**-3

.000

5***

-1.2

384*

**-2

.913

9***

-1.2

117*

**(0

.215

5)(0

.330

4)(0

.218

1)(0

.332

8)(0

.227

6)(0

.343

8)(0

.230

5)(0

.347

6)C

onst

ant

2.70

19**

*1.

5293

***

2.60

97**

*1.

4433

***

2.82

49**

*1.

7033

***

2.61

36**

*1.

5131

***

(0.1

729)

(0.2

694)

(0.1

728)

(0.2

722)

(0.1

800)

(0.2

803)

(0.1

765)

(0.2

812)

Obs

erva

tions

3352

3352

3352

3352

2963

2963

2963

2963

Wal

d Te

st (

χ2 )72

179

864

666

7Ps

eudo

R2

0.40

0.41

0.39

0.41

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

188

App

endi

x T

able

3.2

Con

stra

ined

Mul

tino

mia

l Log

it M

odel

of A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

, 197

4-19

92(F

ixed

and

Peg

ging

as

Bas

elin

e C

ateg

ory;

Rei

gona

l Eff

ect

Incl

uded

in M

odel

)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-0.5

743*

*-0

.185

5-1

.054

9***

-0.6

268*

*(0

.300

2)(0

.297

7)(0

.297

9)(0

.308

3)D

efen

se P

act

-0.9

068*

**-0

.312

0-2

.016

9***

-0.8

558*

**(0

.336

1)(0

.324

5)(0

.378

0)(0

.363

8)E

nten

t Neu

tral

ity0.

5175

0.55

680.

5200

0.36

21(0

.585

6)(0

.604

6)(0

.595

7)(0

.612

4)T

rade

Tie

s-0

.047

8***

-0.0

375*

**-0

.044

5***

-0.0

361*

**-0

.047

6***

-0.0

349*

**-0

.039

8***

-0.0

320*

**(0

.007

4)(0

.008

0)(0

.007

6)(0

.008

3)(0

.007

6)(0

.008

2)(0

.007

9)(0

.009

0)A

ncho

r In

flat

ion

0.03

61**

*0.

0364

***

0.03

58**

*0.

0360

***

0.03

73**

*0.

0375

***

0.03

73**

*0.

0375

***

(0.0

078)

(0.0

078)

(0.0

081)

(0.0

081)

(0.0

076)

(0.0

076)

(0.0

082)

(0.0

082)

Pegg

er’s

Attr

ibut

es-0

.242

9***

-0.2

400*

**-0

.283

1***

-0.2

832*

**(0

.038

8)(0

.039

2)(0

.039

7)(0

.040

4)R

egio

nal E

ffec

t0.

0803

***

0.13

31**

*0.

0826

***

0.13

47**

*0.

0939

***

0.15

26**

*0.

1014

***

0.15

60**

*(0

.021

5)(0

.023

1)(0

.021

1)(0

.023

0)(0

.021

1)(0

.023

8)(0

.020

5)(0

.023

8)Pr

ior

Cho

ice

-2.1

624*

**0.

7752

***

-2.1

319*

**0.

7919

***

-2.2

294*

**0.

6620

***

-2.1

635*

**0.

6939

***

(0.1

135)

(0.0

743)

(0.1

146)

(0.0

753)

(0.1

194)

(0.0

779)

(0.1

220)

(0.0

800)

Con

stan

t3.

1219

***

0.19

113.

0567

***

0.13

943.

0518

***

0.16

692.

8881

***

0.07

72(0

.263

0)(0

.297

9)(0

.258

4)(0

.292

5)(0

.258

8)(0

.306

7)(0

.251

8)(0

.300

2)O

bser

vatio

ns10

945

1094

510

945

1094

599

6799

6799

6799

67W

ald

Test

(χ2 )

1089

1110

1104

1148

Pseu

do R

20.

540.

540.

530.

54

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

189

App

endi

x T

able

4.1

Con

stra

ined

Mul

tino

mia

l Log

it M

odel

of A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

, 197

4–19

92(F

ixed

and

Peg

ging

as

Bas

elin

e C

ateg

ory;

Col

d W

ar D

umm

y In

clud

ed in

Mod

el)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-0.5

660*

*-0

.187

4-1

.044

6***

-0.5

798*

*(0

.295

8)(0

.277

5)(0

.292

0)(0

.279

8)D

efen

se P

act

-0.8

896*

**-0

.306

7-1

.983

3***

-0.7

510*

**(0

.335

0)(0

.297

3)(0

.370

6)(0

.314

3)E

nten

t Neu

tral

ity0.

4913

0.49

180.

4687

0.25

51(0

.586

0)(0

.599

0)(0

.594

0)(0

.600

9)T

rade

Tie

s-0

.046

9***

-0.0

331*

**-0

.043

6***

-0.0

317*

**-0

.046

4***

-0.0

299*

**-0

.039

0***

-0.0

274*

**(0

.007

1)(0

.007

2)(0

.007

2)(0

.007

5)(0

.007

2)(0

.007

3)(0

.007

5)(0

.007

9)A

ncho

r In

flat

ion

0.02

45**

*0.

0247

***

0.02

38**

*0.

0240

***

0.02

42**

*0.

0244

***

0.02

34**

*0.

0236

***

(0.0

066)

(0.0

066)

(0.0

067)

(0.0

067)

(0.0

062)

(0.0

062)

(0.0

063)

(0.0

063)

Pegg

er’s

Attr

ibut

es-0

.239

4***

-0.2

360*

**-0

.283

3***

-0.2

796*

**(0

.036

1)(0

.036

2)(0

.038

0)(0

.038

1)C

old

War

-0.2

386

-1.2

265*

**-0

.243

9-1

.233

5***

-0.3

541*

-1.3

129*

**-0

.338

0-1

.309

2***

(0.1

850)

(0.2

003)

(0.1

851)

(0.2

015)

(0.2

062)

(0.2

169)

(0.2

065)

(0.2

187)

Prio

r C

hoic

e-2

.073

1***

0.94

49**

*-2

.042

7***

0.96

08**

*-2

.117

0***

0.84

88**

*-2

.049

8***

0.87

93**

*(0

.107

5)(0

.058

4)(0

.108

0)(0

.059

1)(0

.114

8)(0

.060

5)(0

.115

9)(0

.061

7)C

onst

ant

3.91

48**

*2.

1571

***

3.87

54**

*2.

1258

***

4.03

64**

*2.

3730

***

3.92

31**

*2.

3012

***

(0.2

903)

(0.3

113)

(0.2

892)

(0.3

104)

(0.3

210)

(0.3

380)

(0.3

172)

(0.3

335)

Obs

erva

tions

1094

510

945

1094

510

945

9967

9967

9967

9967

Wal

d Te

st (

χ2 )95

698

095

810

33Ps

eudo

R2

0.54

0.54

0.53

0.53

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

190

App

endi

x T

able

5.1

Con

stra

ined

Mul

tino

mia

l Log

it M

odel

of A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

, 196

6–19

73(F

ixed

and

Peg

ging

as

Bas

elin

e C

ateg

ory;

U.S

. Dum

my

Incl

uded

in M

odel

)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-0.0

868

-0.1

552

-0.4

170*

*-0

.629

7*(0

.197

2)(0

.230

0)(0

.250

4)(0

.384

3)D

efen

se P

act

-0.3

746*

*-0

.171

5-1

.385

8***

-1.0

878*

*(0

.220

5)(0

.244

2)(0

.355

5)(0

.504

1)E

nten

t Neu

tral

ity0.

5182

-0.0

242

0.71

530.

2852

(0.4

891)

(0.7

529)

(0.6

418)

(0.8

571)

Tra

de T

ies

-0.0

093

-0.0

074

-0.0

074

-0.0

068

-0.0

098

-0.0

127

-0.0

031

-0.0

077

(0.0

069)

(0.0

114)

(0.0

072)

(0.0

118)

(0.0

067)

(0.0

099)

(0.0

079)

(0.0

114)

Anc

hor

Infl

atio

n0.

0518

***

0.05

27**

*0.

0544

***

0.05

52**

*0.

0454

***

0.04

60**

*0.

0505

***

0.05

11**

*(0

.014

8)(0

.015

1)(0

.014

7)(0

.015

0)(0

.014

9)(0

.015

2)(0

.015

2)(0

.015

4)U

.S.

-3.7

394*

**-3

.188

1***

-3.7

064*

**-3

.183

6***

-3.5

954*

**-3

.076

4***

-3.5

195*

**-3

.068

5***

(0.3

196)

(0.2

913)

(0.3

217)

(0.2

938)

(0.3

411)

(0.3

366)

(0.3

469)

(0.3

426)

Pegg

er’s

Attr

ibut

es-0

.078

0***

-0.0

770*

**-0

.068

1***

-0.0

676*

**(0

.010

1)(0

.009

8)(0

.009

9)(0

.009

8)Pr

ior

Cho

ice

-1.9

174*

**-0

.457

4***

-1.8

981*

**-0

.451

0***

-1.9

596*

**-0

.589

3***

-1.9

314*

**-0

.568

5***

(0.1

290)

(0.1

594)

(0.1

286)

(0.1

619)

(0.1

292)

(0.1

725)

(0.1

224)

(0.1

640)

Con

stan

t3.

7263

***

2.50

16**

*3.

6723

***

2.45

41**

*3.

7658

***

2.58

51**

*3.

6314

***

2.46

17**

*(0

.285

2)(0

.320

2)(0

.285

1)(0

.323

3)(0

.301

0)(0

.341

7)(0

.297

3)(0

.337

8)O

bser

vatio

ns33

5233

5233

5233

5229

6329

6329

6329

63W

ald

Test

(χ2 )

933

1012

754

801

Pseu

do R

20.

490.

500.

480.

49

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

191

App

endi

x T

able

5.2

Con

stra

ined

Mul

tino

mia

l Log

it M

odel

of A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

, 197

4–19

92(F

ixed

and

Peg

ging

as

Bas

elin

e C

ateg

ory;

U.S

. Dum

my

Incl

uded

in M

odel

)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-0.1

769

0.10

83-0

.728

6***

-0.2

666

(0.2

711)

(0.2

569)

(0.2

644)

(0.2

582)

Def

ense

Pac

t-0

.409

6*0.

0012

-1.5

726*

**-0

.384

7*(0

.309

1)(0

.274

2)(0

.337

4)(0

.287

8)E

nten

t Neu

tral

ity0.

7089

0.75

600.

5919

0.44

21(0

.567

0)(0

.588

0)(0

.561

0)(0

.583

2)T

rade

Tie

s-0

.032

2***

-0.0

184*

*-0

.030

1***

-0.0

170*

*-0

.028

4***

-0.0

140*

-0.0

224*

**-0

.012

1(0

.007

0)(0

.007

6)(0

.007

1)(0

.007

7)(0

.006

9)(0

.007

8)(0

.007

3)(0

.008

2)A

ncho

r In

flat

ion

0.00

59**

0.00

62**

0.00

55**

0.00

58**

0.00

68**

*0.

0071

***

0.00

65**

0.00

68**

*(0

.002

4)(0

.002

4)(0

.002

3)(0

.002

4)(0

.002

6)(0

.002

6)(0

.002

6)(0

.002

6)U

.S.

-1.7

594*

**-1

.539

3***

-1.7

260*

**-1

.537

3***

-1.8

869*

**-1

.577

7***

-1.8

091*

**-1

.566

0***

(0.3

034)

(0.3

115)

(0.3

064)

(0.3

116)

(0.3

224)

(0.3

313)

(0.3

278)

(0.3

361)

Pegg

er’s

Attr

ibut

es-0

.288

2***

-0.2

851*

**-0

.336

5***

-0.3

311*

**(0

.037

9)(0

.038

0)(0

.039

4)(0

.039

2)Pr

ior

Cho

ice

-1.9

711*

**0.

9666

***

-1.9

590*

**0.

9708

***

-1.9

853*

**0.

8992

***

-1.9

467*

**0.

9158

***

(0.1

105)

(0.0

632)

(0.1

093)

(0.0

630)

(0.1

200)

(0.0

670)

(0.1

190)

(0.0

672)

Con

stan

t4.

1628

***

1.76

20**

*4.

1297

***

1.73

34**

*4.

1539

***

1.87

64**

*4.

0606

***

1.81

13**

*(0

.270

6)(0

.290

4)(0

.271

1)(0

.289

9)(0

.276

2)(0

.294

3)(0

.274

7)(0

.290

2)O

bser

vatio

ns10

945

1094

510

945

1094

599

6799

6799

6799

67W

ald

Test

(χ2 )

1317

1327

1339

1356

Pseu

do R

20.

550.

550.

540.

54

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

192

App

endi

x T

able

6.1

Con

stra

ined

Mul

tino

mia

l Log

it M

odel

of A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

, 196

6–19

73(F

ixed

and

Peg

ging

as

Bas

elin

e C

ateg

ory;

Col

onia

l Tie

s In

clud

ed in

Mod

el)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-0.5

893*

**-0

.752

1***

-0.7

052*

*-1

.069

0***

(0.2

510)

(0.2

859)

(0.3

407)

(0.4

341)

Def

ense

Pac

t-0

.850

8***

-0.7

298*

**-1

.603

5***

-1.4

893*

**(0

.282

2)(0

.298

0)(0

.456

7)(0

.572

3)E

nten

t Neu

tral

ity-0

.148

1-0

.787

20.

1069

-0.3

846

(0.5

030)

(0.7

977)

(0.7

322)

(0.9

795)

Tra

de T

ies

-0.0

611*

**-0

.051

0***

-0.0

585*

**-0

.050

7***

-0.0

717*

**-0

.066

0***

-0.0

626*

**-0

.059

6***

(0.0

139)

(0.0

178)

(0.0

137)

(0.0

184)

(0.0

198)

(0.0

198)

(0.0

185)

(0.0

214)

Anc

hor

Infl

atio

n0.

1390

***

0.13

98**

*0.

1427

***

0.14

35**

*0.

1216

***

0.12

20**

*0.

1261

***

0.12

64**

*(0

.021

7)(0

.021

9)(0

.021

7)(0

.021

9)(0

.021

9)(0

.022

1)(0

.022

0)(0

.022

2)Pe

gger

’s A

ttrib

utes

0.00

00-0

.078

4***

0.00

00-0

.077

4***

0.00

00-0

.067

7***

0.00

00-0

.067

1***

(0.0

000)

(0.0

104)

(0.0

000)

(0.0

101)

(0.0

000)

(0.0

100)

(0.0

000)

(0.0

098)

Col

onia

l Tie

s3.

9907

***

3.08

74**

3.83

47**

*3.

0541

**4.

3408

***

3.48

19**

*3.

8964

***

3.13

03**

(1.2

312)

(1.2

097)

(1.2

414)

(1.2

102)

(1.3

910)

(1.3

119)

(1.4

046)

(1.3

837)

Prio

r C

hoic

e-2

.592

0***

-0.7

069*

**-2

.566

3***

-0.6

982*

**-2

.467

7***

-0.7

740*

**-2

.410

7***

-0.7

362*

**(0

.172

8)(0

.172

2)(0

.174

1)(0

.177

0)(0

.186

2)(0

.188

4)(0

.182

7)(0

.188

7)C

onst

ant

2.58

36**

*1.

3205

***

2.53

28**

*1.

2706

***

2.73

72**

*1.

5382

***

2.61

64**

*1.

4208

***

(0.1

604)

(0.2

332)

(0.1

686)

(0.2

443)

(0.1

790)

(0.2

473)

(0.1

895)

(0.2

621)

Obs

erva

tions

3352

3352

3352

3352

2963

2963

2963

2963

Wal

d Te

st (

χ2 )48

852

640

846

4Ps

eudo

R2

0.41

0.41

0.41

0.41

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%

193

App

endi

x T

able

6.2

Con

stra

ined

Mul

tino

mia

l Log

it M

odel

of A

ncho

r C

urre

ncy

and

Fix

ed-F

lexi

ble

Reg

ime

Cho

ices

, 197

4–19

92(F

ixed

and

Peg

ging

as

Bas

elin

e C

ateg

ory;

Col

onia

l Tie

s In

clud

ed in

Mod

el)

All

Pot

enti

al P

eggi

ng C

ount

ry–P

oten

tial

Anc

hor

Dya

dsD

evel

opin

g P

oten

tial

Peg

ging

Cou

ntr y

–Pot

enti

al A

ncho

r D

yads

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Fix

ed a

nd N

oF

lexi

ble

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Peg

ging

Reg

ime

Alli

ance

-0.2

845

-0.0

238

-0.7

363*

**-0

.391

7*(0

.312

5)(0

.294

3)(0

.310

9)(0

.296

8)D

efen

se P

act

-0.5

328*

-0.1

069

-1.5

710*

**-0

.513

7*(0

.362

4)(0

.320

6)(0

.401

5)(0

.337

7)E

nten

t Neu

tral

ity0.

4636

0.42

260.

4256

0.17

13(0

.545

1)(0

.587

7)(0

.537

8)(0

.575

7)T

rade

Tie

s-0

.062

8***

-0.0

410*

**-0

.059

8***

-0.0

397*

**-0

.067

7***

-0.0

397*

**-0

.060

0***

-0.0

374*

**(0

.009

1)(0

.008

1)(0

.009

3)(0

.008

4)(0

.010

0)(0

.008

5)(0

.010

2)(0

.009

1)A

ncho

r In

flat

ion

0.01

84**

*0.

0187

***

0.01

79**

*0.

0182

***

0.01

83**

*0.

0186

***

0.01

79**

*0.

0182

***

(0.0

055)

(0.0

055)

(0.0

054)

(0.0

054)

(0.0

053)

(0.0

053)

(0.0

053)

(0.0

053)

Pegg

er’s

Attr

ibut

es0.

0000

-0.2

901*

**0.

0000

-0.2

871*

**0.

0000

-0.3

407*

**0.

0000

-0.3

370*

**(0

.000

0)(0

.038

3)(0

.000

0)(0

.038

3)(0

.000

0)(0

.039

7)(0

.000

0)(0

.039

7)C

olon

ial T

ies

4.91

07**

*4.

6835

***

4.82

41**

*4.

6342

***

5.09

76**

*4.

6312

***

4.87

68**

*4.

5237

***

(1.0

191)

(1.0

604)

(1.0

187)

(1.0

600)

(1.0

297)

(1.0

730)

(1.0

267)

(1.0

708)

Prio

r C

hoic

e-2

.004

6***

0.95

37**

*-1

.985

8***

0.96

42**

*-2

.035

3***

0.87

40**

*-1

.992

2***

0.89

45**

*(0

.106

7)(0

.059

1)(0

.106

8)(0

.059

7)(0

.113

6)(0

.060

5)(0

.114

1)(0

.061

8)C

onst

ant

3.63

45**

*1.

2317

***

3.60

55**

*1.

2045

***

3.65

88**

*1.

3896

***

3.58

80**

*1.

3386

***

(0.1

827)

(0.2

195)

(0.1

829)

(0.2

186)

(0.1

870)

(0.2

187)

(0.1

860)

(0.2

159)

Obs

erva

tions

1094

510

945

1094

510

945

9967

9967

9967

9967

Wal

d Te

st (

χ2 )10

1010

2697

310

24Ps

eudo

R2

0.54

0.54

0.53

0.53

Rob

ust s

tand

ard

erro

rs in

par

enth

eses

, adj

uste

d fo

r cl

uste

ring

ove

r dy

ad.

* si

gnif

ican

t at 1

0%; *

* si

gnif

ican

t at 5

%; *

** s

igni

fica

nt a

t 1%