The Effects of Openness and Globalization on Inflation: An ARDL Bounds Test Approach

Abstract The purpose of this paper is to test the hypothesis first proposed by Romer (1993); suggesting that inflation is lower in more open economies. According to this hypothesis, central banks have a lower incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper. Furthermore, Comparing with other empirical studies, this paper has used the new KOF globalization index to estimate the relationship between economic globalization and inflation. We utilized the ARDL Bounds test approach to level relationship proposed by Pesaran et al. (2001) for Iranian annual data during 1970-2009. The results from Bounds test approach confirm the existence of the long-run relationship among the variables for both spesification. The results show that openness has a negative and significant effect on inflation in short-run but its effect on inflation in long-run is positive. Globalization has a negative and significant effect on inflation in short-run and long-run. Thus, it seems that the new economic globalization (KOF index) which is a broader comprehensive index is a better proxy of openness.