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What is really puzzling about the “distance puzzle”

Clement Bosquet () and Hervé Boulhol

Review of World Economics (Weltwirtschaftliches Archiv), 2015, vol. 151, issue 1, 1-21

Abstract: This paper studies the change in the distance elasticity of trade between 1948 and 2006. The elasticity sharply increased, when gravity equations are estimated by ordinary least squares in log form (log-OLS), while it was broadly stable or slightly increasing, depending on the specification, based on Poisson pseudo-maximal likehood (PPML) in levels, a standard estimator. We show that such a divergence is due to the increased heterogeneity of trade flows. However, gamma pseudo-maximal likehood, which should be consistent under the assumptions that make PPML so appealing, generate estimates that are significantly different from PPML and actually closer to log-OLS. We provide tentative solutions to this puzzle. Copyright Kiel Institute 2015

Keywords: Distance puzzle; Gravity equations; Pseudo-maximum likelihood methods; F10; F15; C13; C21; C23 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:spr:weltar:v:151:y:2015:i:1:p:1-21