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Currency Unions and Trade: A PPML Re‐assessment with High‐dimensional Fixed Effects

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  • Mario Larch
  • Joschka Wanner
  • Yoto V. Yotov
  • Thomas Zylkin

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

  • Mario Larch & Joschka Wanner & Yoto V. Yotov & Thomas Zylkin, 2019. "Currency Unions and Trade: A PPML Re‐assessment with High‐dimensional Fixed Effects," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(3), pages 487-510, June.
  • Handle: RePEc:bla:obuest:v:81:y:2019:i:3:p:487-510
    DOI: 10.1111/obes.12283
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    Cited by:

    1. Inmaculada Martínez-Zarzoso, 2019. "The Euro and the CFA Franc: Evidence of Sectoral Trade Effects," Open Economies Review, Springer, vol. 30(3), pages 483-504, July.
    2. Chen, Natalie & Novy, Dennis, 2017. "Currency unions, trade and heterogeneity," LSE Research Online Documents on Economics 88487, London School of Economics and Political Science, LSE Library.
    3. Thierry Mayer & Vincent Vicard & Soledad Zignago & Beata Javorcik, 2019. "The cost of non-Europe, revisited," Economic Policy, CEPR;CES;MSH, vol. 34(98), pages 145-199.
    4. Ornelas, Emanuel & Ritel, Marcos, 2018. "The not-so-generalized effects of the Generalized System of Preferences," CEPR Discussion Papers 13208, C.E.P.R. Discussion Papers.
    5. Laurent Didier, 2019. "Soft power and exporters behavior in international trade," Economics Bulletin, AccessEcon, vol. 39(4), pages 2595-2614.
    6. Mario Larch & Aiko F. Schmeißer & Joschka Wanner, 2019. "A Tale of (Almost) 1001 Coefficients: Deep and Heterogeneous Effects of the EU-Turkey Customs Union," CESifo Working Paper Series 7498, CESifo Group Munich.
    7. Larch, Mario & Monteiro, José-Antonio & Piermartini, Roberta & Yotov, Yoto, 2019. "On the Effects of GATT/WTO Membership on Trade: They are Positive and Large After All," School of Economics Working Paper Series 2019-4, LeBow College of Business, Drexel University.
    8. Federico Carril-Caccia & Juliette Milgram Baleix & Jordi Paniagua, 2019. "Does Terrorism Affect Foreign Direct Investment?," Working Papers 1913, Department of Applied Economics II, Universidad de Valencia.
    9. Ana Cuadros & Jordi Paniagua & Antonio Navas, 2019. "Moving ideas across borders: Migrant inventors, patents and FDI," Working Papers 1904, Department of Applied Economics II, Universidad de Valencia.
    10. Brunel, Claire & Zylkin, Thomas, 2019. "Do Cross-border Patents Promote Trade?," MPRA Paper 92514, University Library of Munich, Germany.
    11. Philipp Harms & Jakub Knaze, 2018. "Bilateral De-Jure Exchange Rate Regimes and Foreign Direct Investment: A Gravity Analysis," Working Papers 1808, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    12. Mahdi Ghodsi, 2019. "How Do Technical Barriers to Trade Affect Foreign Direct Investment?," wiiw Working Papers 160, The Vienna Institute for International Economic Studies, wiiw.
    13. Harald Oberhofer & Gerhard Streicher, 2019. "Die Handelseffekte der österreichischen EU-Mitgliedschaft 25 Jahre nach der Volksabstimmung," WIFO Studies, WIFO, number 61796, June.
    14. Troy Lorde & Antonio Alleyne & Roger Hosein & Mu Yifei, 2020. "Should the Caribbean Look to the East? An Assessment of Caribbean Export Potential," The International Trade Journal, Taylor & Francis Journals, vol. 34(1), pages 136-150, January.
    15. Harald Oberhofer, 2019. "Die Handelseffekte von Österreichs EU-Mitgliedschaft und des Europäischen Binnenmarktes," WIFO Monatsberichte (monthly reports), WIFO, vol. 92(12), pages 883-890, December.
    16. Isaac Mensah, 2019. "The euro's effect on trade: an analysis of "old" and "new" EMU members," Review of Economics and Institutions, Università di Perugia, vol. 10(1).

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