Does Inflation Uncertainty Matter for Validity of Romer’s Hypothesis? Evidence from Nigeria.

Alimi, R. Santos and Olorunfemi, Sola (2018): Does Inflation Uncertainty Matter for Validity of Romer’s Hypothesis? Evidence from Nigeria.

Abstract

Romer (1993) posits openness to international restricts inflation. He offers an explanation based on time-inconsistency of monetary policy, however ensuing studies have raised questions on the validity of Romer’s assertion and its explanation. The aim of this paper was to estimate the effect of trade openness on inflation employing quantile regression analysis, contrary to traditional mean regression methods using annual data from Nigeria for the period 1970 to 2016. The paper also tested the hypothesis of whether inflation uncertainty influence the validity of Romer’s hypothesis for Nigeria. The study adopted two measures of openness – share of trade to GDP and KOF globalization index. The results of the study validate Romer’s hypothesis for both openness indexes that openness restrict inflation. With the inclusion of inflation uncertainty, the estimated impact of trade openness on inflation was quantitatively larger and the t-statistic on the interaction variable is significant in all quantiles except for the median quantile (0.50) and their coefficients are positive. The study concluded that in all distributions of inflation, inflation uncertainty reduces the ability of openness to trade in curbing inflation. Therefore, it recommends that policy maker should target and control inflation uncertainty when openness is employed as key policy instrument for controlling inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade openness, inflation, globalization index, inflation uncertainty, quantile regression.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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