INFLATION AND OPENNESS: EMPIRICAL EVIDENCES FROM IRAN (1965-2010)

The aim of this paper is to examine the causal relationship between inflation and openness in Iran emphasizing long-run relations during 1965 - 2010. To do so, I used growth rate of the consumer prices as the indicator of inflation and total exports and imports as a percentage of GDP to measure trade openness. Then I applied Vector Error Correction Model to estimate the proposed model. The results show that there is a one-way causal relationship from inflation to openness in Iran during the observation period and inflation has a positively significant impact on trade openness, so that 1% increase in inflation rate has led to approximately 0.12% increase in trade openness in the next period and 0.19% increase in trade openness in the next two period.