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Romer Was Right on Openness and Inflation: Evidence from Sub-Saharan Africa

Author

Listed:
  • Faqin Lin
  • Dongzhou Mei
  • Huanhuan Wang
  • Xi Yao

Abstract

Romer (1993) documents a negative relation between trade openness and inflation and offers an explanation based on time-inconsistency of monetary policy, but subsequent research casts doubt on the negative relationship and the explanation. This paper contributes to this debate by estimating the effect of openness to international trade on inflation with panel data from Sub-Saharan Africa. Employing instrumental variable techniques that correct for endogeneity bias of trade openness, the empirical evidence suggests that within-country variations in trade openness restrict inflation: a 1 percentage point increase in the ratio of trade over gross domestic product is associated with a decrease in inflation of approximately 0.08 percentage points per year. These results are robust to additional controls, different measurements of trade openness and alternative instruments. Finally, we inspect the time-inconsistency mechanism of the negative-relationship between trade openness and inflation.

Suggested Citation

  • Faqin Lin & Dongzhou Mei & Huanhuan Wang & Xi Yao, 2017. "Romer Was Right on Openness and Inflation: Evidence from Sub-Saharan Africa," Journal of Applied Economics, Taylor & Francis Journals, vol. 20(1), pages 121-140, May.
    • Handle: RePEc:taf:recsxx:v:20:y:2017:i:1:p:121-140
    DOI: 10.1016/S1514-0326(17)30006-5
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    Cited by:

    1. Ekpo, Akpan H. & Effiong, Ekpeno L., 2017. "Openness and the Effects of Monetary Policy in Africa," MPRA Paper 80847, University Library of Munich, Germany.
    2. Muhammad Tahir & Norulazidah Omar Ali & Imran Naseem & Umar Burki, 2023. "Trade Openness and Inflation Rate in China: Empirical Evidence from Time Series Data," Economies, MDPI, vol. 11(10), pages 1-10, September.
    3. Igor Drapkin & Kirill Sidorov & Oleg Mariev, 2022. "The Effect of Sanctions on EU-Russia Trade: The Study for 2015 – 2019," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 70(9-10), pages 743-767, August.
    4. Tomader Gaber Elbasheer Elhassan, 2020. "The Asymmetric Impact of Trade Openness on Inflation in Sudan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(12), pages 1396-1409, December.
    5. Fernando Marques Mansilla & Elano Ferreira Arruda & Roberto Tatiwa Ferreira, 2020. "Trade openness and inflation dynamics in Brazil," Economics Bulletin, AccessEcon, vol. 40(3), pages 1948-1957.
    6. Alimi, R. Santos & Olorunfemi, Sola, 2018. "Does Inflation Uncertainty Matter for Validity of Romer’s Hypothesis? Evidence from Nigeria," MPRA Paper 90948, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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