Abstract
The nexus between inflation and trade openness has been one of the major concerns among the researchers and policy makers in both developed and developing economies. The exact relationship between inflation and openness is still in ambiguity. Various studies have been done for different countries and regional groups using different methodologies to measure the relationship between openness and inflation, but all remained in vain. Although there are different views regarding this relationship, most of the empirical studies supported the Romer’s hypothesis (Q J Econ 108(4):869–903, 1993) of an inverse association between openness and inflation in the economy. The present study has made an attempt to examine the factors influencing the price level, especially trade openness, in India from 1974–1975 to 2015–2016. For empirical investigation, the study has employed autoregressive distributed lag (ARDL) model bounds testing approach to co-integration (Pesaran et al., J Appl Econ 16(3):289–326, 2001). The obtained results revealed the presence of positive relationship between inflation and trade openness in India, which negates the Romer’s hypothesis.
Similar content being viewed by others
References
Ada OE, Oyeronke A, Odunayo AJ, Okoruwa VO, Obi-Egbedi O (2014) Trade openness and inflation in Nigerian economy: a vector error correction model (VECM) approach. Res J Finance Account 5(21):74–85
Aliyev K, Gasimov I (2014) Openness-inflation nexus in south caucasus economies. Munich Personal RePEc Archive. https://mpra.ub.uni-muenchen.de/62761/. Accessed 23 Nov 2017
Barro RJ, Gordon DB (1983) Rules, discretion and reputation in a model of monetary policy. J Monetary Econ 12(1):101–121
Bleaney MF (1999) The disappearing openness inflation relationship: a cross country analysis of inflation rates. In: IMF working paper 161
Bowdler C, Nunziata L (2006) Trade openness and inflation episodes in the OECD. J Money Credit Bank 38(2):553–563
Edwards S (2006) The relationship between exchange rates and inflation targeting revisited. National Bureau of Economic Research, Cambridge
Eijffinger SCW, Qian Z (2010) Globalization and the output-inflation tradeoff: new time series evidence, vol 27. Center and European Banking Center, Tilburg University, Netherlands, pp 1–24
Engle R, Granger G (1987) Cointegration and error correction: representation, estimation and testing. Econometrica 55:251–276
Friedman M, Schwartz A (1963) A monetary history of the United States. Princeton University Press, New Jersey
Granger CWJ (1981) Some properties of time series data and their use in econometric model specification. J Econ 28:121–130
Gruen D, Dwyer J (1995) Are terms of trade rises inflationary? Reserve Bank of Australia, Sydney. Research discussion paper no. 9508
Gruen D, Shuetrim G (1994) Internationalization and the macro-economy. In: International integration of the Australian Economy. Proceedings of a conference, Reserve Bank of Australia, Sydney, pp 309–363
Gruben WC, Mcleod D (2004) The openness-inflation puzzle revisited. Appl Econ Lett 11(8):465–468
Haq IU, Alotaish M, MS, Kumara NGS, Otamorudov S (2014) Revisiting Romer’s hypothesis: time series evidence from mall open economy. Pak J Appl Econ 24(1):1–15
Iyoha MA (1973) Inflation and openness in less developed economies: a cross-country analysis. Econ Dev Cult Change 22(1):31–38
Johansen S, Juselius K (1990) Maximum likelihood estimation and inference on cointegration-with applications to the demand for money. Oxford Bull Econ Stat 52(2):169–210
Kurihara Y (2013) International trade openness and inflation in Asia. Res World Econ 4(1):70–75
Kydland E, Prescott E (1977) Rules rather than discretion: the inconsistency of optimal plans. J Polit Econ 85:473–492
Lane PR (1997) Inflation in open economics. J Int Econ 42:447–462
Mahmoudzadeh M, Shadabi L (2012) Inflation and trade freedom: an empirical analysis. World Appl Sci J 18(2):286–291
Munir S, Kiani AK (2011) Relationship between trade openness and inflation: empirical evidences from Pakistan. Pak Dev Rev 50:853
Nasser OMA., Sachsida A, and Mendonça MJC (2009) The openness-inflation puzzle: panel data evidence. Int Res J Finance Econ 169–181. https://www.eurojournals.com/finance.htm. Accessed 23 Nov 2017
Pesaran MH et al (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econ 16(3):289–326
Rogoff K (1985) The optimal degree of commitment to an intermediate monetary target. Q J Econ 100:1169–1189
Romer D (1993) Openness and inflation; theory and evidence. Q J Econ 108(4):869–903
Sachsida A, Mendonça MJC (2006) Inflation and trade openness revised: an analysis using panel data. Instituto de Pesquisa Economics Aplicada, pp 1–12
Salimifar M, Razmi MJ, Taghizadegan Z (2015) A survey of the effect of trade openness size on inflation rate in iran using ARDL. Theor Appl Econ 22(3):143–154
Sargent T, Wallace N (1981) Some unpleasant monetary arithmetic. Federal Reserve Bank Minneap Q Rev 5(3):1–17
Sepehrivand A, Azizi J (2016) The effect of trade openness on inflation in d-8 member countries with an emphasis on Romer theory. Asian J Econ Model 4(4):162–167
Sikdar A, Kundu N, Khan ZS (2013) Trade openness and inflation: a test of Romer hypothesis for Bangladesh. Munich Personal RePEcArchive, pp 85–96
Taylor JB (1983) Comments. J Monetary Econ 12:123–125
Temple J (2002) Openness, inflation and the phillips curve: a puzzle. J Money Credit Bank 34:450–468
Terra CT (1998) Openness and inflation: a new assessment. Q J Econ 113(2):641–652
Triffin R, Grubel H (1962) The adjustment mechanism to differential rates of monetary expansion among the countries of the European economic community. Rev Econ Stat 44:486–491
World Bank (2002) Globalization, growth, and poverty: building an inclusive world economy. Oxford University Press, Washington, DC
Wu CS, Lin JL (2008) The relationship between openness and inflation in Asian4 (NIE’s) and the G7. National Bureau of Economic Research, pp 109–137. https://www.nber.org/books/ito_08-1. Accessed 23 Nov 2017
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Chhabra, M., Alam, Q. An empirical study of trade openness and inflation in India. Decision 47, 79–90 (2020). https://doi.org/10.1007/s40622-020-00237-7
Published:
Issue Date:
DOI: https://doi.org/10.1007/s40622-020-00237-7