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Do dynamics and heterogeneity in panel data models matter?

An application to central banks’ demand for international reserves

Abstract

This article investigates empirically the determinants of central banks’ reserve holdings for a large panel data set of developing and transition countries covering the period from 1975 to 2003. It estimates both a static and a dynamic relationship and applies estimators for homogeneous and heterogeneous panel data. Thereby, it examines the extent to which conclusions of panel data studies on the determinants of international reserve holdings are robust to the inclusion of dynamics as well as to the consideration of heterogeneity across countries. The results show that the neglect of dynamics and heterogeneity in country behaviour may lead to misleading inferences. Independently of the chosen estimation method, the findings suggest that trade openness and external debt are robust determinants of the level of reserves. Central banks take precautionary measures against the downside of the increasing international economic integration.

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Correspondence to Andreas Steiner.

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Steiner, A. Do dynamics and heterogeneity in panel data models matter?. Empir Econ 40, 165–176 (2011). https://doi.org/10.1007/s00181-010-0423-2

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Keywords

  • Panel data models
  • Poolability
  • Parameter heterogeneity
  • International reserves
  • Central Bank Behaviour

JEL Classification

  • C23
  • E58
  • F31