Abstract:
The purpose of this paper is to test the hypothesis first proposed by Romer (1993); suggesting that inflation is lower in more open economies. According to this hypothesis, central banks have a lower incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper. Furthermore, Comparing with other empirical studies, this paper has used the new KOF globalization index to estimate the relationship between economic globalization and inflation. We utilized the ARDL Bounds test approach to level relationship proposed by Pesaran et al. (2001) for Iranian annual data during 1970-2009. The results from Bounds test approach confirm the existence of the long-run relationship among the variables for both spesification. The results show that openness has a negative and significant effect on inflation in short-run but its effect on inflation in long-run is positive. Globalization has a negative and significant effect on inflation in short-run and long-run. Thus, it seems that the new economic globalization (KOF index) which is a broader comprehensive index is a better proxy of openness.
Machine summary:
"The Effects of Openness and Globalization on Inflation: An ARDL Bounds Test Approach Ahmad Jafari Samimi 1 University of Mazandaran, Babolsar jafarisa@umz.
Romer (1993) used a Barro-Gorden type of model for a cross section of 114 countries and argued that inflation is lower in small and open economies even in the absence of an independent central bank with pre-commitment to price stability.
Wynne and Kersting (2007) showed that there is a robust negative relationship across countries between a country’s openness to trade and its long-run inflation rate in the United States.
Their analysis showed that the principal result of Romer still holds in the 1990s; however, Terra’s criticism fails to hold in the 1990s as the negative relationship between inflation and openness remains unrestrictive to a subset of countries or specific time period.
The empirical findings under the cointegration test show that there is a significant negative long-run relationship between inflation and trade openness, which confirms the existence of Romer’s hypothesis in Pakistan.
Table 2: KOF Index of Globalization Indices and Variables Weights Economic Globalization [37%] i) Actual Flows (50%) Trade (percent of GDP) (19%) Foreign Direct Investment, flows (percent of GDP) (20%) Foreign Direct Investment, stocks (percent of GDP) (24%) Portfolio Investment (percent of GDP) (17%) Income Payments to Foreign Nationals (percent of GDP) (20%) ii) Restrictions (50%) Hidden Import Barriers (22%) Mean Tariff Rate (28%) Taxes on International Trade (percent of current revenue) (27%) Capital Account Restrictions (22%) Social Globalization [39%] i) Data on Personal Contact (33%) Telephone Traffic (26%) Transfers (percent of GDP) (3%) International Tourism (26%) Foreign Population (percent of total population) (20%) International letters (per capita) (25%) ii) Data on Information Flows (36%) Internet Users (per 1000 people) (36%) Television (per 1000 people) (36%) Trade in Newspapers (percent of GDP) (28%) iii) Data on Cultural Proximity (31%) Number of McDonald's Restaurants (per capita) (43%) Number of Ikea (per capita) (44%) Trade in books (percent of GDP) (12%) Political Globalization [25%] Embassies in Country (25%) Membership in International Organizations (28%) Participation in U."