Discrete Choice Modeling with Nonstationary Panels Applied to Exchange Rate Regime Choice

Sainan Jin
Guanghua School of Management
Peking University
This Version: May 2005

ABSTRACT
This paper develops a regression limit theory for discrete choice nonstationary
panels with large cross section (N) and time series (T ) dimensions. The asymptotic
theory allows for both sequential and joint limits for the maximum likelihood (ML)
estimation of such systems. We further obtain an asymptotic theory for tests of coefficient
homogeneity, and the model is extended to allow for cross section dependence.
The approach is applied to exchange rate regime choice by monetary authorities,
and we provide an analysis of the empirical phenomenon known as “fear of floating”.
JEL Classification: C23, C25
Keywords: Cross section dependence, Factor model, Discrete choice model, Exchange
rate regime, Fear of floating, Fixed effects, Homogeneity testing, Joint limits, Brownian
local time, Sequential limits.