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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1159:
The Distance Puzzle: On the Interpretation of the Distance Coefficient in Gravity Equations

Claudia M. Buch, Jörn Kleinert and Farid Toubal

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.

Keywords: distance coefficients, gravity equations, globalization; (follow links to similar papers)

JEL-Codes: F0; F21; (follow links to similar papers)

25 pages, March 2003

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