We develop a novel two-stage methodology that allows us to study the empirical determinants of the ex post effects of past free trade agreements (FTAs) as well as obtain ex ante predictions for the effects of future FTAs. We first identify 908 unique estimates of the effects of FTAs on different trading pairs for the years 1986-2006. We then employ these estimates as our dependent variable in a "second stage" characterizing the heterogeneity in these effects. Interestingly, most of this heterogeneity (~ 2/3) occurs within FTAs (rather than across different FTAs), with asymmetric effects within pairs (on exports vs. imports) also playing a important role. We offer several intuitive explanations for these variations. Even with the same agreement, FTA effects are weaker for more distant pairs and for pairs with otherwise high levels of ex ante trade frictions. The effects of new FTAs are similarly weaker for pairs with existing agreements already in place. In addition, we are able to relate asymmetries in FTA effects to each country's ability to influence the other's terms of trade. Out-of-sample predictions incorporating these insights enable us to predict direction-specific effects of future FTAs between any pair of countries. A simulation of the general equilibrium effects of TTIP demonstrates the importance of our methods.
In this paper we present ppmlhdfe, a new Stata command for estimation of (pseudo) Poisson regression models with multiple high-dimensional fixed effects (HDFE). Estimation is implemented using a modified version of the iteratively reweighted least-squares (IRLS) algorithm that allows for fast estimation in the presence of HDFE. Because the code is built around the reghdfe package, it has similar syntax, supports many of the same functionalities, and benefits from reghdfe's fast convergence properties for computing high-dimensional least squares problems. Performance is further enhanced by some new techniques we introduce for accelerating HDFE-IRLS estimation specifically. ppmlhdfe also implements a novel and more robust approach to check for the existence of (pseudo) maximum likelihood estimates.
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).
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