Trade Openness and Inflation Dynamics: A Panel Data Analysis
Date
2024-01-31
Authors
Parsi, Rouzbeh
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Abstract
This thesis focuses on the intricate empirical relationship between trade openness and inflation, challenging previous literature that suggests a straightforward negative correlation between the two. By employing recently developed dynamic heterogeneous panel methods and constructing a comprehensive panel dataset, which encompasses a spectrum of economic, political, and financial indicators, as well as two proxies for openness, we offer a nuanced perspective on the topic. Central to our findings is the critical role of allowing cross-sectional dependence in panel data, which has been frequently overlooked in past studies. Our analysis reveals a multifaceted relationship, where the influence of trade openness on inflation is dynamic and ambiguous in its direction. While traditional openness metrics remain useful, multidimensional proxies, such as the KOF trade openness index, have the potential to provide richer insights. Our results underscore the need for a thorough analysis and robust methodologies when exploring this economic relationship, suggesting that the dynamics of trade and inflation are more complex than previously assumed.
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Keywords
Inflation, Cross-section dependence, Trade Openness, Dynamic Common Correlated Effects