DOI

10.1111/obes.12283

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.

Document Type

Post-print Article

Publication Date

2019

Publisher Statement

Copyright © 2019 Wiley Subscription Services, Inc. Article first published online: November 2018.

DOI: 10.1111/obes.12283.

The definitive version is available at:https://onlinelibrary-wiley-com.newman.richmond.edu/doi/full/10.1111/obes.12283.

Please note that downloads of the article are for private/personal use only.

Full Citation:

Larch, Mario, Joschka Wanner, Yoto V. Yotov and Thomas Zylkin. "Currency Unions Trade: A PPML Re-Assessment with High-Dimensional Fixed Effects." Oxford Bulletin of Economics and Statistics 81, no. 3 (June 2019): 487–510. https://doi.org/10.1111/obes.12283.

Available for download on Tuesday, June 01, 2021

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