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Does Trade Openness Reduce Inflation? Empirical Evidence from Pakistan

Tahir Mukhtar ()
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Tahir Mukhtar: Department of Economics, Fatima Jinnah Women’s University, Rawalpindi, Pakistan

Lahore Journal of Economics, 2010, vol. 15, issue 2, pages 35-50

Abstract: One of the more celebrated propositions found in international trade is the case that trade liberalization is associated with declining prices, so that protectionism is inflationary. In line with this view, Romer (1993) postulates the hypothesis that inflation is lower in small and open economies. The objective of this study is to examine Romer’s hypothesis in Pakistan. For this purpose, we have used multivariate cointegration and a vector error correction model. The study covers the period from 1960 to 2007. 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.

Keywords: Trade openness; inflation; cointegration; vector error correction model; Pakistan. (search for similar items in EconPapers)
JEL-codes: C22 F41 O53 (search for similar items in EconPapers)
Date: 2010
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