Has Distance Died? Evidence from a Panel Gravity Model
Posted: 2 May 2007
This paper addresses the distance "puzzle" in the gravity model of trade according to which the estimated coefficient of distance is generally found to increase rather than decrease through time. After having shown that the puzzle is a robust finding in our large sample of 130 countries over the period 1962-1996, it is shown that the introduction of an "augmented" barrier-to-trade function removes the paradox, yielding a decline in the estimate of the elasticity of trade to distance of about 11% over the thirty five year period for the whole sample, but that the "death of distance" is largely confined to bilateral trade between rich countries.
Keywords: Gravity Model, Transport Costs, Econometrics of panel data
JEL Classification: F11, C23, L91
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