Relationship between Trade Openness and Inflation: Empirical Evidences from Pakistan (1976-2010).

Sehar Munir, Adiqa Kausar Kiani


This study empirically verifies the existence of significant
relationship between inflation and trade openness for Pakistan using
annual time-series data for the period of 1976 to 2010. The basic
objective of this study is to examine the Romer‘s hypothesis for
Pakistan with real agriculture value added, real exchange rate, real
gross domestic product, financial market openness, money and quasi money
and used trade openness, import openness and export openness ratios
separately as explanatory variables with inflation rate as dependent
variables. For this purpose, we have used multivariate Johansen (1998)
and Johansen and Juselius (1990) Maximum Likelihood Cointegration
Approach and a Vector Error Correction Model (VECM) and the expected
empirical findings shows that there is a significant positive long-run
relationship between inflation and trade openness, which rejects the
existence of Romer‘s hypothesis for Pakistan. JEL classification: B26,
E31, P24, P44 Keywords: Trade Openness, Inflation, Unit Root Testing,
Multivariate Cointegration Approach, Vector Error Correction Model,

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