Currency Unions and Trade: A PPML Re‐Assessment with High‐Dimensional Fixed Effects

24 Pages Posted: 16 Apr 2019

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

affiliation not provided to SSRN

Date Written: June 2019

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 associated with the three‐way (exporter‐time, importer‐time, and country pair) fixed effects currently recommended in the gravity literature have heretofore limited the choice of estimator, leaving an important methodological gap. To address this gap, we introduce an iterative poisson pseudo‐maximum likelihood (PPML) estimation procedure that facilitates the inclusion of these fixed effects for large data sets and also allows for 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. Most importantly, our estimates for both the overall CU effect and the Euro effect specifically are economically small and statistically insignificant. We also document that linear and PPML estimates of the Euro effect increasingly diverge as the sample size grows.

Suggested Citation

Larch, Mario and Wanner, Joschka and Yotov, Yoto and Zylkin, Thomas, Currency Unions and Trade: A PPML Re‐Assessment with High‐Dimensional Fixed Effects (June 2019). Oxford Bulletin of Economics and Statistics, Vol. 81, Issue 3, pp. 487-510, 2019. Available at SSRN: https://ssrn.com/abstract=3372512 or http://dx.doi.org/10.1111/obes.12283

Mario Larch (Contact Author)

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

Universitätsstraße 30
Bayreuth, 95447
Germany
0049 / (0) 921 - 55 6240 (Phone)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

CESifo ( email )

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Germany

Ifo Institute for Economic Research ( email )

Poschinger Str. 5
Munich, 01069
Germany

GEP at the University of Nottingham ( email )

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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

affiliation not provided to SSRN

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