Romer Was Right on Openness and Inflation: Evidence from Sub-Saharan Africa

Faqin Lin, Dongzhou Mei, Huanhuan Wang and Xi Yao

Journal of Applied Economics, 2017, vol. 20, issue 1, 121-140

Abstract: Romer (1993) documents a negative relation between trade openness and inflation and offers an explanation based on time-inconsistency of monetary policy, but subsequent research casts doubt on the negative relationship and the explanation. This paper contributes to this debate by estimating the effect of openness to international trade on inflation with panel data from Sub-Saharan Africa. Employing instrumental variable techniques that correct for endogeneity bias of trade openness, the empirical evidence suggests that within-country variations in trade openness restrict inflation: a 1 percentage point increase in the ratio of trade over gross domestic product is associated with a decrease in inflation of approximately 0.08 percentage points per year. These results are robust to additional controls, different measurements of trade openness and alternative instruments. Finally, we inspect the time-inconsistency mechanism of the negative-relationship between trade openness and inflation.

Date: 2017
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DOI: 10.1016/S1514-0326(17)30006-5

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