The Relationship between Trade Openness and Inflation: Testing Romer Hypothesis For BRICS-T Countries
Keywords:
Trade openness, inflation, Romer hypothesis, panel data analysisAbstract
Along with the globalization of trade and the dominance of the free market economy in the world, the concept of trade openness has gained importance. It is known that the concept of trade openness has a positive impact on income, employment and consumption, as well as on economic growth. In addition to the relations with the macro-economic variables mentioned, the relationship between the concept of trade openness and inflation has also been frequently discussed in the literature. Although it is a segment that accepts that inflation rates will decrease as trade openness increases, the opposite view argues that inflation rates will increase as trade openness increases. In his study, Romer (1993) suggested that small and open economies would have lower inflation rates. The aim of this study is to demonstrate the effect of trade openness on inflation for BRICS-T countries and to test the Romer hypothesis. As a result of the LM Bootstrap panel cointegration test developed by Westerlund and Edgerton (2007) to determine long-term relationships, it was found that there was a long-term relationship. According to long-term coefficient estimates for the Panel, it was determined that trade openness would lead to a 26.3% decrease in inflation. The highest effect of trade openness on inflation is Russia, South Africa, China, Brazil, India and Turkey, respectively, according to the coefficient sizes. An error correction model has been estimated to determine the short-term relationship. The coefficient of the term error correction is negative and statistically significant, the model's error correction mechanism works. The short-term effect of the trade openness variable on inflation has been seen to be higher than in the long-term.
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