*Bounty: 50*

*Bounty: 50*

I am estimating a gravity model aiming at evaluating how environmental policies can affect trade patterns. I am using a ppml model using the *ppmlhdfe* command in Stata.

As identification strategy, I am using dyadic fixed effects. The model that I am estimating is the following:

$ex_{ij,t} = exp[alpha_{i,t}+ alpha_{j,t}+ alpha_{ij}+ boldsymbol{beta_1 D_{eu,j} times Policy_{i,t}}] times varepsilon_{ij,t}$

Where export between countries *i* and *j* ($ex_{ij,t}$) is a function of exporter-year ($alpha_{i,t}$), importer-year ($alpha_{j,t}$), and dyadic fixed effects ($alpha_{ij}$). My main variable of interest is an interaction between $D_{eu,j}$ that is a dummy variable that indicating whether the importer country $j$ is part of the EU(1=EU, 0= otherwise). $Policy_{i,t}$ is the log of a continuous variable that indicates stringency in environmental policies in the exporter country *i*. My aim is to assess whether having stringent environmental policies favours exports towards the EU affecting trade patterns. The interaction is identified because it varies for every dyad-year. The problem is how to interpret the coefficient of the interaction ($beta_1$).

The issue is that because of collinearity with the fixed effects I cannot estimate the individual coefficients for $D_{eu,j}$ and $Policy_{i,t}$. Hence I cannot do plots not I can say what is the reference level.

For instance, what would a significant coefficient of 0.4 mean?

Would it be correct to say that to a 1% increase in the policy score, exports towards the EU increase by 49% ($[e^{0.4}-1]*100=49%$) relative to exports to non-EU members?

Is there any way to estimate the significance level of these coefficients? I am not sure how I could estimate margin plots.

If anyone can help to understand the coefficient it would be very much appreciated.