The Gravity Model is the workhorse for empirical studies in International
Economies for its empirical power and it is commonly used in explaining the
trade flow between countries; it relies on a function that relates the trade
with the masses of the two countries and the distance (as a proxy of the
trasport costs) between them. However, the notion that using of distance
functions in conventional interaction models effectively captures spatial
dependence in international flows has long been challenged. It has been
recently fully recognized that a spatial interaction effect exists essentially
due to the spatial spillover and the third country effect. This motivates the
introduction of the spatial autoregressive components in the so-called spatial
gravity model of trade. A so-called weight matrix is used in order to define
the set of the spatial neighbors and it is traditionally based on the inverse
of the distance. Two issues follow from this standard procedure: the first
regards the biasness of the distance if it is used as a proxy of the transport
costs in a panel data, the second is related to the collinearity emerging if we
use distance twice. So, several attempt were made in the recent literature
having the scope of remove the distance. We propose a theoretically consistent
procedure based on Anderson, Van Wincoop derivation model, and some ad-hoc
tests, relating to this attempt. The empirical results based on a 22-years
panel of OECD countries are conforting, and they allow us to estimate the model
without the distance, if properly replaced by a set of fixed effects. This
article, in addition, fits in the dispute about how to estimate the
multilateral resistance terms.Comment: 17 page
