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

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

Abstract

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.

Suggested Citation

  • Buch, Claudia M. & Kleinert, Jörn & Toubal, Farid, 2003. "The Distance Puzzle: On the Interpretation of the Distance Coefficient in Gravity Equations," Kiel Working Papers 1159, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkwp:1159
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    More about this item

    Keywords

    distance coefficients; gravity equations; globalization;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F0 - International Economics - - General

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