Revising the distance puzzle: structural gravity evidence from Turkiye

Purpose-This paper re-examines the "distance puzzle" for Türkiye's bilateral exports and assesses whether large, stable distance elasticities primarily reflect estimation choices or persistent trade frictions in an emerging-market setting. Methodology-Using CEPII benchmark-year data for 1996–2020, the study estimates three nested gravity specifications: (i) conventional log-linear OLS, (ii) PPML in levels, and (iii) an extended PPML model incorporating domestic trade flows and Türkiye–year effects to account for multilateral resistance and home bias. Institutional and macro-financial frictions are proxied by partner political stability and USD–TRY exchange-rate volatility. Findings-OLS reproduces large and stable distance coefficients averaging –1.70, exceeding meta-analytic benchmarks by 70–90 percent. Once heteroskedasticity, zero-flow structure, and home bias are addressed through structural estimation, the average distance elasticity declines to –0.58—a reduction of approximately 65 percent. Political stability loses significance under structural controls, while exchange-rate volatility becomes precisely estimated and positive, indicating intensive-margin concentration during volatile periods rather than extensive-margin expansion. Conclusion- The results support the interpretation that the distance puzzle is primarily an estimation artifact in emerging-market contexts. Distance remains economically significant as a composite trade-cost proxy bundling geographic, informational, and financial frictions. For policymakers, the findings suggest that trade diversification strategies should address not only physical connectivity but also currency risk management and relationship-building costs that elevate effective distance for emerging-market exporters. Keywords: Structural gravity, PPML, distance puzzle, home bias