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Trade openness and inflation: A test of Romer hypothesis for Bangladesh

Sikdar, Asaduzzaman and Kundu, Nobinkhor and Khan, Zakir Saadullah (2013): Trade openness and inflation: A test of Romer hypothesis for Bangladesh. Published in: The Journal of Comilla University , Vol. 2, No. 1 (26 December 2013): pp. 85-96.

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An important prediction found in international trade is that Trade openness can affect inflation. The trade openness or trade liberalization is associated with declining prices, that is, there is negative relation between inflation and trade openness. In line with this view, Romer (1993) postulates the hypothesis that inflation is lower in small and open economies. The objective of this paper is to explore the relationship between trade openness and inflation for the small economy Bangladesh using data over 1976 -2010 period. For this purpose, Cointegration Approach and a Vector Error Correction Model (VECM) have been used. Empirical results show that there is a significant negative long-run relationship between inflation and trade openness, which confirms the existence of Romer’s hypothesis in Bangladesh.

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