Does Greater Trade Openness Reduce Inflation? Further Evidence Using Panel Data Techniques

In this article we estimate the relation between inflation and trade openness [e.g; Romer (1993)] using modern panel data techniques. Our rationale is as follows: The higher the gains, in terms of product, in generating an inflationary "surprise", the greater the incentives will be for the government to effect such a "surprise". Therefore, in the absence of an independent monetary authority - or a credible monetary authority - able to restrain the governmental incentive to generate inflation, trade openness would act as a "brake" for the gains generated by the inflationary "surprise". Consequently, more open countries would have fewer incentives to generate inflation, thus pointing to a negative relation between inflation and trade openness