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This paper suggests an empirical modeling strategy which takes full account of the structural, non-(log-)linear impact of endogenous trade barriers on trade in new trade theory models. In particular, we use the framework to evaluate and quantify the role of endogenous preferential trade agreement (PTA) membership for trade. Apart from paying attention to structural modeling of the impact of trade policy on trade, the suggested model takes into account both that preferential trade agreement membership is endogenous and that the world matrix of bilateral trade flows contains numerous zero entries. These features are treated in an encompassing way by means of (possibly two-part) Poisson pseudo-maximum likelihood estimation with endogenous binary indicator variables in the empirical model.

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, importertime, 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. JEL Classification numbers: C13; C23; C55; F14; F15; F33. specifically investigate the effect of the EMU. Santos Silva and Tenreyro (2010a) and Rose (2017) survey each of these literatures.2 Of course, endogeneity of common currencies may also arise from time-varying bilateral effects. Our investigation does not tackle these sources of selection into currency unions. 3 Glick (2017) demonstrates that these results are robust to controlling for EU membership and further shows that there is heterogeneity in the trade effects between new and old EMU members. 4 Glick and Rose (2016) include these results in an earlier working paper available online (Glick and Rose, 2015).They still estimate a generally positive 'additional effect' for the EMU vs. other CUs, but find the overall CU effect disappears over time, echoing an earlier finding by de Sousa (2012).