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


  • Larch, Mario

    () (University of Bayreuth)

  • Wanner, Joschka

    () (University of Bayreuth)

  • Yotov, Yoto

    () (School of Economics Drexel University)

  • Zylkin, Thomas

    () (National University of Singapore)


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.

Suggested Citation

  • Larch, Mario & Wanner, Joschka & Yotov, Yoto & Zylkin, Thomas, 2017. "The Currency Union Effect: A PPML Re-assessment with High-Dimensional Fixed Effects," School of Economics Working Paper Series 2017-7, LeBow College of Business, Drexel University.
  • Handle: RePEc:ris:drxlwp:2017_007

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    References listed on IDEAS

    1. Massimiliano Bratti & Luca Benedictis & Gianluca Santoni, 2014. "On the pro-trade effects of immigrants," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(3), pages 557-594, August.
    2. Volker Nitsch, 2002. "Honey, I Shrunk the Currency Union Effect on Trade," The World Economy, Wiley Blackwell, vol. 25(4), pages 457-474, April.
    3. Fernández-Val, Iván & Weidner, Martin, 2016. "Individual and time effects in nonlinear panel models with large N, T," Journal of Econometrics, Elsevier, vol. 192(1), pages 291-312.
    4. Alina Mika & Robert Zymek, 2016. "Friends Without Benefits? New EMU Members and the Euro Effect on Trade," ESE Discussion Papers 269, Edinburgh School of Economics, University of Edinburgh.
    5. French, Scott, 2016. "The composition of trade flows and the aggregate effects of trade barriers," Journal of International Economics, Elsevier, vol. 98(C), pages 114-137.
    6. María Pía Olivero & Yoto V. Yotov, 2012. "Dynamic gravity: endogenous country size and asset accumulation," Canadian Journal of Economics, Canadian Economics Association, vol. 45(1), pages 64-92, February.
    7. Magerman, Glenn & Studnicka, Zuzanna & Van Hove, Jan, 2016. "Distance and border effects in international trade: A comparison of estimation methods," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 10, pages 1-31.
    8. Tom Zylkin, 2016. "PPML_PANEL_SG: Stata module to estimate "structural gravity" models via Poisson PML," Statistical Software Components S458249, Boston College Department of Economics, revised 18 May 2017.
    9. Kareem, Fatima O., 2014. "Modeling and Estimation of Gravity Equation in the Presence of Zero Trade: A Validation of Hypotheses Using Africa's Trade Data," 140th Seminar, December 13-15, 2013, Perugia, Italy 163341, European Association of Agricultural Economists.
    10. Sergio Correia, 2014. "REGHDFE: Stata module to perform linear or instrumental-variable regression absorbing any number of high-dimensional fixed effects," Statistical Software Components S457874, Boston College Department of Economics, revised 06 Aug 2016.
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    Cited by:

    1. David J. Kuenzel, 2017. "Do Trade Flows Respond to Nudges? Evidence from the WTO’s Trade Policy Review Mechanism," Wesleyan Economics Working Papers 2017-006, Wesleyan University, Department of Economics.

    More about this item


    Currency Unions; PPML; High-dimensional Fixed Effects;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • F10 - International Economics - - Trade - - - General
    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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