The openness-inflation puzzle: an asymmetric approach

ABSTRACT

The paper analyzes Inflation Openness (IO) relationship in an asymmetric framework using lag inflation, lag external debt and lag output growth as transition variables. Considering a Panel Smooth Transition Regression (PSTR) model with annual data of 41 developing countries for a period of 45 years from 1972 to 2016, we found a clear negative relationship between inflation and openness. This relationship becomes strong during periods of high inflation, high output growth and low external debt. We argue that though openness reduces inflation, its impact varies depending upon the state of the economy. We conclude that analysing the IO relationship using a linear framework may result in inaccurate and misleading outcomes.

KEYWORDS:

• Inflation
• openness
• asymmetric effects

JEL:

• E31
• F41
• C34

Acknowledgements

We thank Dr. Srikanta Kundu, Smruti Ranjan Sahoo, Aiswarya Thomas and anonymous referees for their helpful comments. Usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. We also considered openness as a transition variable but ’t could not reject the linear framework. Thus we excluded it as a potential transition variable

2. We also considered openness as a transition variable however it could not reject the linearity test.

3. We use a balanced panel data for estimating PSTR model

4. We also considered openness as a transition variable but could not reject the null hypothesis of linearity.

Additional information

Notes on contributors

Irfan Ahmad Shah

Irfan Ahmad Shah is a PhD scholar at Centre for Development Studies, Jawaharlal Nehru University. His area of research includes open macro and monetary economics.

Ammu Lavanya

Ammu Lavanya was a Research Assistant at Centre for Development Studies, Jawaharlal Nehru University. Her research interests are in international finance and macroeconomics.