The Currency Union Effect: A PPML Re-Assessment with High-Dimensional Fixed Effects

27 Pages Posted: 10 Jun 2017

See all articles by Mario Larch

Mario Larch

University of Bayreuth - Faculty of Law, Business and Economics; University of Bayreuth; CESifo; Ifo Institute for Economic Research; GEP at the University of Nottingham; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Joschka Wanner

University of Bayreuth

Yoto Yotov

Drexel University - Department of Economics & International Business

Thomas Zylkin

National University of Singapore (NUS), Department of Economics

Date Written: May 22, 2017

Abstract

Recent work on the effects of currency unions (CUs) on trade stresses the importance of using many countries and years in order to obtain reliable estimates. However, for large samples, computational issues limit choice of estimator, leaving an important methodological gap. To address this gap, we unveil an iterative PPML estimator which flexibly accounts for multilateral resistance, pair-specific heterogeneity, and correlated errors across countries and time. When applied to a comprehensive sample with more than 200 countries trading over 65 years, these innovations flip the conclusions of an otherwise rigorously-specified linear model. Our estimates for both the overall CU effect and the Euro effect specifically are economically small and statistically insignificant. The effect of non-Euro CUs, however, is large and significant. Notably, linear and PPML estimates of the Euro effect increasingly diverge as the sample size grows.

Keywords: currency unions, PPML, high-dimensional fixed effects

JEL Classification: C130, C210, F100, F150, F330

Suggested Citation

Larch, Mario and Wanner, Joschka and Yotov, Yoto and Zylkin, Thomas, The Currency Union Effect: A PPML Re-Assessment with High-Dimensional Fixed Effects (May 22, 2017). CESifo Working Paper Series No. 6464. Available at SSRN: https://ssrn.com/abstract=2983709

Mario Larch (Contact Author)

University of Bayreuth - Faculty of Law, Business and Economics ( email )

Universit├Ątsstra├če 30
Bayreuth, 95447
Germany
0049 / (0) 921 - 55 6240 (Phone)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Ifo Institute for Economic Research ( email )

Poschinger Str. 5
Munich, 01069
Germany

GEP at the University of Nottingham ( email )

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Nottingham, NG7 2RD
United Kingdom

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

Joschka Wanner

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Yoto Yotov

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Thomas Zylkin

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

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