Revisiting the Romer’s Hypothesis and Openness and Inflation Relationship for Pakistan

Abstract

The substantial economic integration coupled with the increased inflation becomes serious dilemma for developing economies. Inflation has recently emerged as the major economic issue, making it necessary to investigate the additional causes of this issue. This study revisited the age-old subject of how openness affects inflation, utilizing time-series data from 1990 to 2021 for Pakistan. Primary goal of study is to investigate Romer hypothesis and relationship between openness as well as inflation in Pakistan using Co-integration analysis. Other explanatory variables are the growth of real agriculture value added, an average annual growth rate of money, and quasi-money and openness of economy. Though openness and inflation have a positive long-run relationship, there is no evidence of a short-run relationship, refuting Romer's argument for Pakistan. Present study offered signifncant information through results and support from previous studies in reaching the conclusion about inflation and its main reasons behand. Additionally, it offers renewed perspectives on how inflation is affected by global economic integration and how it thus undesarbaly influenced the financial growth from different dimensions that further hinders sustainable development.