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The distance puzzle: on the interpretation of the distance coefficient in gravity equations

  • Buch, Claudia M.
  • Kleinert, Jorn
  • Toubal, Farid

Globalization seems to have diminished the importance of geographical distance. However, empirical studies find that distance coefficients in gravity equations change little over time. This paper argues that changes in distance coefficients do not carry much information on changes in distance costs over time. Changes in distance costs are to a large extent picked up solely in the constant term of gravity models. The distance coefficient instead measures the relative difference between far way and close countries. A proportional fall in distance costs that leads to a proportional increase in economic activity would be consistent with constant distance coefficients.

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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 83 (2004)
Issue (Month): 3 (June)
Pages: 293-298

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Handle: RePEc:eee:ecolet:v:83:y:2004:i:3:p:293-298
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  13. Toubal, Farid & Kleinert, Jörn & Buch, Claudia M., 2003. "Determinants of German FDI: New Evidence from Micro-Data," Discussion Paper Series 1: Economic Studies 2003,09, Deutsche Bundesbank, Research Centre.
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