Trade Effects of the Euro: a Comparison of Estimators

Abstract

This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We argue that the best estimator involves time-varying country dummies, a time dummy and time-invariant pair dummies.