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The Distance Puzzle: On the Interpretation of the Distance Coefficient in Gravity Equations

  • Claudia M. Buch
  • Jörn Kleinert
  • Farid Toubal

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: https://www.ifw-members.ifw-kiel.de/publications/the-distance-puzzle-on-the-interpretation-of-the-distance-coefficient-in-gravity-equations/kap1159.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1159.

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Length: 25 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:kie:kieliw:1159
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  1. Martin, Philippe & Rey, Hélène, 2000. "Financial Super-Markets: Size Matters for Asset Trade," Center for International and Development Economics Research, Working Paper Series qt0dr2z6p9, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. 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.
  3. 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.).
  4. 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.
  5. Jean-François BRUN & Céline CARRERE & Patrick GUILLAUMONT & Jaime MELO DE, 2002. "Has Distance Died? Evidence from a Panel Gravity Model," Working Papers 200215, CERDI.
  6. 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.
  7. Claudia M. Buch & Jörn Kleinert & Farid Toubal, 2003. "The Distance Puzzle: On the Interpretation of the Distance Coefficient in Gravity Equations," Kiel Working Papers 1159, Kiel Institute for the World Economy.
  8. Leamer, E. & Levingsohn, J., 1994. "International Trade Theory: The Evidence," Working Papers 368, Research Seminar in International Economics, University of Michigan.
  9. Bougheas, Spiros & Demetriades, Panicos O. & Morgenroth, Edgar L. W., 1999. "Infrastructure, transport costs and trade," Journal of International Economics, Elsevier, vol. 47(1), pages 169-189, February.
  10. Peter Egger, . "A Note on the Proper Econometric Specification of the Gravity Equation," WIFO Working Papers 108, WIFO.
  11. 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.
  12. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
  13. 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.
  14. Claudia M. Buch, 2005. "Distance and International Banking," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 787-804, 09.
  15. 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.
  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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