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

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  • 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
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    References listed on IDEAS

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    Cited by:

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    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

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