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

Listed author(s):
  • 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.

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Paper provided by LeBow College of Business, Drexel University in its series School of Economics Working Paper Series with number 2017-7.

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Length: 26 pages
Date of creation: 29 Apr 2017
Handle: RePEc:ris:drxlwp:2017_007
Contact details of provider: Web page: http://www.lebow.drexel.edu/

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  1. Volker Nitsch, 2002. "Honey, I Shrunk the Currency Union Effect on Trade," The World Economy, Wiley Blackwell, vol. 25(4), pages 457-474, 04.
  2. 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.
  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. 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.
  5. 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.
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