Economic Openness And Inflation Relationship Between Empirical Research

Based on the investigative operation significance, my research uses single indicator method, and puts the international trade perspective to give a definition of the economic openness, that is, the proportion of the domestic market value of residents purchasing foreign goods and services in GDP. On the basis of open economy and dynamic inconsistency theory, this paper uses the open economy model with dynamic inconsistency of optimal monetary policy as a base for theoretical analysis on the openness-inflation relationships. What the findings of my research is a negative correlation between the economic openness and inflation. Meanwhile, the author establishes temporal series/cross-section data model to undertake empirical study about the findings above.In course of establishing temporal series/cross-section data model, the author uses the Phillips curve with adaptive expectation, considering the optimal monetary policy and dynamic inconsistency, the two keys of standard closed economy model , and introducing the definition of open economy, as a base for analysing the relatively expansion and wealth depreciatory effect to which the job enlargement and a motive for increasing output lead. On the basis of it, the author introduces quantity theory of money created by Fisher, and sets up temporal series/cross-section data regression model, then carries on empirical study. Considering the inconsistent factors, for example, the types of country, economic structure, the level of development, the scale of development and so on, there are the selected sample of 21 countries and of the date from 1st quarter of 1996 to 3rd quarter of 2008 to make up the panel data. Meanwhile, this paper adopts SUR estimation method of variable intercept model with fixed effect including AR(1) to conduct the empirical study and a sort research in accordance with those factors mentioned above toward 21 countries, including Norway, Switzerland, Denmark, Sweden, America, Finland, Belgium, Britain, Japan, France, Hong Kong of China, mainland of China, New Zealand, Portugal, South Korea, Taiwan of China, Czech, Slovakia, Brazil, Australia and India.The findings of empirical study illustrate that economic openness and inflation have the notable negative correlation in sample space, and support the theoretical analysis before we establish the model and consistency theory of inflation originated by Romer(1993). However, doing empirical test cannot neglects those factors, for example, economic traits, level of development, model of development. Not all of 21 countries in sample space have the negative correlation, even some countries have remarkable positive correlation. By doing the sort research about regression results of 21 countries, we can find that between economic openness and inflation have notable negative correlation in those countries with higher GDP per capita. Although these countries of emerging market have the lower GDP per capita, their relationship have remarkable negative correlation; for Hong Kong, South Korea and Taiwan among four little dragons in Asia, their relationship have non-uniform correlation. For Hong Kong with highly open economic structure in global economy, their relationship have prominent positive correlation, nevertheless between economy openness and inflation for South Korea and Taiwan have the negative correlation, but its empirical study is not apparent.