Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/161903
Authors: 
Larch, Mario
Wanner, Joschka
Yotov, Yoto V.
Zylkin, Thomas
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6464
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 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.
Subjects: 
currency unions
PPML
high-dimensional fixed effects
JEL: 
C13
C21
F10
F15
F33
Document Type: 
Working Paper

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