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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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File URL: http://www.sciencedirect.com/science/article/B6V84-4BRPNCT-5/2/a9fc2e568cb83db7acc15d17115216ab
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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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  1. Buch, Claudia M. & Kleinert, Jorn & Toubal, Farid, 2004. "The distance puzzle: on the interpretation of the distance coefficient in gravity equations," Economics Letters, Elsevier, vol. 83(3), pages 293-298, June.
  2. Caroline L. Freund & Diana Weinhold, 2000. "On the effect of the Internet on international trade," International Finance Discussion Papers 693, Board of Governors of the Federal Reserve System (U.S.).
  3. Philippe Martin & Helene Rey, 2001. "Financial Super-Markets: Size Matters for Asset Trade," NBER Working Papers 8476, National Bureau of Economic Research, Inc.
  4. Leamer, Edward E., 1993. "U.S. manufacturing and an emerging Mexico," The North American Journal of Economics and Finance, Elsevier, vol. 4(1), pages 51-89.
  5. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters, in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
  6. Spiros Bougheas & Panicos Demetriades & Edgar Morgenroth, 1996. "Infrastructure, Transport Costs and Trade," Keele Department of Economics Discussion Papers (1995-2001) 96/7, Department of Economics, Keele University.
  7. Brun, Jean-François & Carrère, Céline & de Melo, Jaime & Guillaumont, Patrick, 2002. "Has Distance Died? Evidence from a Panel Gravity Model," CEPR Discussion Papers 3500, C.E.P.R. Discussion Papers.
  8. Leamer, E. & Levingsohn, J., 1994. "International Trade Theory: The Evidence," Working Papers 368, Research Seminar in International Economics, University of Michigan.
  9. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  10. Peter Egger, . "A Note on the Proper Econometric Specification of the Gravity Equation," WIFO Working Papers 108, WIFO.
  11. Claudia M. Buch, 2005. "Distance and International Banking," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 787-804, 09.
  12. Peter Egger, 2002. "An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials," The World Economy, Wiley Blackwell, vol. 25(2), pages 297-312, 02.
  13. Simeon Djankov & Caroline Freund, 2002. "New borders: Evidence from the former Soviet Union," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 138(3), pages 493-508, September.
  14. Jeffrey A. Frankel & Andrew K. Rose, 2000. "Estimating the Effect of Currency Unions on Trade and Output," NBER Working Papers 7857, National Bureau of Economic Research, Inc.
  15. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
  16. 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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