An empirical study of trade openness and inflation in India

Abstract

The nexus between inflation and trade openness has been one of the major concerns among the researchers and policy makers in both developed and developing economies. The exact relationship between inflation and openness is still in ambiguity. Various studies have been done for different countries and regional groups using different methodologies to measure the relationship between openness and inflation, but all remained in vain. Although there are different views regarding this relationship, most of the empirical studies supported the Romer’s hypothesis (Q J Econ 108(4):869–903, 1993) of an inverse association between openness and inflation in the economy. The present study has made an attempt to examine the factors influencing the price level, especially trade openness, in India from 1974–1975 to 2015–2016. For empirical investigation, the study has employed autoregressive distributed lag (ARDL) model bounds testing approach to co-integration (Pesaran et al., J Appl Econ 16(3):289–326, 2001). The obtained results revealed the presence of positive relationship between inflation and trade openness in India, which negates the Romer’s hypothesis.