Openness and inflation: New empirical panel data evidence

The purpose of this paper is to test the hypothesis first documented by Romer (1993), that inflation is lower in more open economies. According to this hypothesis, central banks have a smaller incentive to engineer surprise inflations in economies that are more open because the Phillips curve is steeper. In this paper, the panel data technique has been employed to examine the aforementioned hypothesis concerning the developed and developing countries over the last two decades. Also, comparing with other empirical studies, this paper has estimated the relationship between economic globalization as one dimension of the new KOF globalization index and inflation. The paper’s results cast substantial doubts on the conventional view that suggests a robust and negative relationship between trade openness and inflation. The estimation result regarding the traditional measure of trade openness indicates a positive and significant association between trade openness and inflation which opposes the view of the Romer (1993) hypothesis. In contrast, the estimation results regarding a new economic globalization index (the KOF index) suggest that higher economic globalization will decrease inflation, as supported by the Romer (1993) hypothesis for both developed and developing countries during 1990–9 and 2000–9. Thus, it seems that the new economic globalization measure (the KOF index), which is a broader comprehensive index, is a better proxy for openness.