IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/65244.html
   My bibliography  Save this paper

Trade openness and inflation: A test of Romer hypothesis for Bangladesh

Author

Listed:
  • Sikdar, Asaduzzaman
  • Kundu, Nobinkhor
  • Khan, Zakir Saadullah

Abstract

An important prediction found in international trade is that Trade openness can affect inflation. The trade openness or trade liberalization is associated with declining prices, that is, there is negative relation between inflation and trade openness. In line with this view, Romer (1993) postulates the hypothesis that inflation is lower in small and open economies. The objective of this paper is to explore the relationship between trade openness and inflation for the small economy Bangladesh using data over 1976 -2010 period. For this purpose, Cointegration Approach and a Vector Error Correction Model (VECM) have been used. Empirical results show that there is a significant negative long-run relationship between inflation and trade openness, which confirms the existence of Romer’s hypothesis in Bangladesh.

Suggested Citation

  • Sikdar, Asaduzzaman & Kundu, Nobinkhor & Khan, Zakir Saadullah, 2013. "Trade openness and inflation: A test of Romer hypothesis for Bangladesh," MPRA Paper 65244, University Library of Munich, Germany, revised 16 Oct 2013.
    • Handle: RePEc:pra:mprapa:65244
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/65244/1/MPRA_paper_65244.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Yanikkaya, Halit, 2003. "Trade openness and economic growth: a cross-country empirical investigation," Journal of Development Economics, Elsevier, vol. 72(1), pages 57-89, October.
    2. William Gruben & Darryl Mcleod, 2004. "The openness-inflation puzzle revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 11(8), pages 465-468.
    3. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 869-903.
    4. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    5. Tahir Mukhtar, 2010. "Does Trade Openness Reduce Inflation? Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 35-50, Jul-Dec.
    6. Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 371-379, April.
    7. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
    8. Cristina T. Terra, 1998. "Openness and Inflation: A New Assessment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 641-648.
    9. Sachsida, Adolfo & Carneiro, Francisco Galrao & Loureiro, Paulo R. A., 2003. "Does greater trade openness reduce inflation? Further evidence using panel data techniques," Economics Letters, Elsevier, vol. 81(3), pages 315-319, December.
    10. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    11. Sehar Munir & Adiqa Kausar Kiani, 2011. ". Relationship between Trade Openness and Inflation: Empirical Evidences from Pakistan (1976–2010)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 853-876.
    12. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: Cross-country evidence," Economics Papers 2005-W14, Economics Group, Nuffield College, University of Oxford.
    13. Kim, MinKyoung & Beladi, Hamid, 2005. "Is free trade deflationary?," Economics Letters, Elsevier, vol. 89(3), pages 343-349, December.
    14. Janine Aron & John Muellbauer, 2007. "Inflation dynamics and trade openness: with an application to South Africa," CSAE Working Paper Series 2007-11, Centre for the Study of African Economies, University of Oxford.
    15. Jim Granato & Melody Lo & M. C. Sunny Wong, 2007. "A note on Romer's openness-inflation relation: the responsiveness of AS and AD to economic openness and monetary policy," Applied Economics, Taylor & Francis Journals, vol. 39(2), pages 191-197.
    16. Mr. M. F. Bleaney, 1999. "The Disappearing Openness-Inflation Relationship: A Cross-Country Analysis of Inflation Rates," IMF Working Papers 1999/161, International Monetary Fund.
    17. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
    18. Temple, Jonathan, 2002. "Openness, Inflation, and the Phillips Curve: A Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 450-468, May.
    19. Muellbauer, John & Aron, Janine, 2007. "Inflation Dynamics and Trade Openness," CEPR Discussion Papers 6346, C.E.P.R. Discussion Papers.
    20. Bowdler, Christopher & Nunziata, Luca, 2006. "Trade Openness and Inflation Episodes in the OECD," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 553-563, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Megha Chhabra & Qamar Alam, 2020. "An empirical study of trade openness and inflation in India," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 47(1), pages 79-90, March.
    2. Arshi Shahid & Hafiz Khalil Ahmad & Saima Liaqat, 2020. "Inflation, Globalization and Interest Rate Nexus to Curb Price volatility: An Empirical Cross-Country Analysis," Global Economics Review, Humanity Only, vol. 5(1), pages 153-165, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mostafa SALIMIFAR & Mohammad Javd RAZMI & Zahra TAGHIZADEGAN, 2015. "A survey of the effect of trade openness size on inflation rate in Iran using ARDL," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(604), A), pages 143-154, Autumn.
    2. Tahir Mukhtar, 2010. "Does Trade Openness Reduce Inflation? Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 35-50, Jul-Dec.
    3. Aliyev, Khatai & Gasimov, Ilkin, 2014. "Openness-Inflation Nexus in South Caucasus Economies," MPRA Paper 62761, University Library of Munich, Germany.
    4. repec:agr:journl:v:3(604):y:2015:i:3(604):p:143-154 is not listed on IDEAS
    5. Megha Chhabra & Qamar Alam, 2020. "An empirical study of trade openness and inflation in India," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 47(1), pages 79-90, March.
    6. Daniels, Joseph P. & VanHoose, David D., 2009. "Openness, income-tax progressivity, and inflation," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 485-491, September.
    7. Mazhar, Ummad & Jafri, Juvaria, 2014. "Does an informal sector reduce the economic dividends of political stability? Empirical evidence," MPRA Paper 60764, University Library of Munich, Germany.
    8. Hülya Saygılı, 2020. "Sectoral inflationary dynamics: cross-country evidence on the open-economy New Keynesian Phillips Curve," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(1), pages 75-101, February.
    9. Joseph Daniels & David VanHoose, 2009. "Trade Openness, Capital Mobility, and the Sacrifice Ratio," Open Economies Review, Springer, vol. 20(4), pages 473-487, September.
    10. Adolfo Sachsida & Mário Jorge Cardoso de Mendonça, 2006. "Inflation and Trade Openness Revised: an Analysis Using Panel Data," Discussion Papers 1148, Instituto de Pesquisa Econômica Aplicada - IPEA.
    11. Aram Sepehrivand & Jabar Azizi, 2016. "The Effect of Trade Openness on Inflation in D-8 Member Countries with an Emphasis on Romer Theory," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 4(4), pages 162-167, December.
    12. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.
    13. Hülya Saygılı, 2020. "The nature of trade, global production fragmentation and inflationary dynamics: Cross‐country evidence," The World Economy, Wiley Blackwell, vol. 43(7), pages 2007-2031, July.
    14. Andrea Vaona, 2015. "The price-price Phillips curve in small open economies and monetary unions: theory and empirics," International Economics and Economic Policy, Springer, vol. 12(2), pages 281-307, June.
    15. Badinger, Harald, 2009. "Globalization, the output-inflation tradeoff and inflation," European Economic Review, Elsevier, vol. 53(8), pages 888-907, November.
    16. Cavelaars, Paul, 2009. "Does globalisation discipline monetary policymakers?," Journal of International Money and Finance, Elsevier, vol. 28(3), pages 392-405, April.
    17. Ghosh, Amit, 2014. "How do openness and exchange-rate regimes affect inflation?," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 190-202.
    18. Hayat, Zafar & Balli, Faruk & Rehman, Muhammad, 2017. "The relevance and relative robustness of sources of inflation bias in Pakistan," Economic Modelling, Elsevier, vol. 63(C), pages 283-303.
    19. Erasmus K. Kersting & Mark A. Wynne, 2007. "Openness and inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Apr.
    20. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: cross-country evidence," CSAE Working Paper Series 2005-08, Centre for the Study of African Economies, University of Oxford.
    21. Wolfgang Lechthaler, 2017. "Ben Bernanke in Doha: The Effect of Monetary Policy on Optimal Tariffs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(8), pages 1715-1746, December.

    More about this item

    Keywords

    Inflation; Trade Openness; Bangladesh;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:65244. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.