Empirical analysis of the relationship between openness and inflation: a case study of sub-Saharan Africa

Francis Obeng Afari (), Jong Chil Son () and Horlali Yaw Haligah ()
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Francis Obeng Afari: Hankuk University of Foreign Studies
Horlali Yaw Haligah: University of Ghana

SN Business & Economics, 2021, vol. 1, issue 6, 1-23

Abstract: Abstract Earlier empirical studies carried out on the relationship between openness and inflation have focused mainly on long run effects without considering the short run dynamics. However, this study looked at both the short run and long run relationship between openness and inflation for 25 countries in Sub-Saharan Africa (SSA) using an annual data spanning from 1985 to 2017. The Autoregressive Distributed Lag (ARDL) Model and the Dumitrescu Hurlin panel causality test were the main estimation techniques employed by this study. The results revealed a significant positive relationship between trade openness and inflation both in the short run and long run. Also, there was an evidence of positive relationship between financial openness and inflation both in the short run and long run. However, the relationship was statistically insignificant in the short run. The study further showed a bidirectional relationship between trade openness and inflation, at least for a 9-year lag period. These findings highlight the role openness play in affecting price levels in SSA. Hence, the study recommends that policy makers and various governments in SSA need to design and execute programmes that would help build import substitution industries. Also, government must strengthen the financial sector and increase its supervisory role by ensuring that laws are strictly adhered to by all financial actors. This will help curtail the problem of money laundry in the sub-region thereby reducing the adverse effects opening up the financial sector has on price levels.

Keywords: Trade openness; Financial openness; Inflation; Sub-Sahara Africa (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s43546-021-00081-6

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