Abstract:
One of the more celebrated propositions found in international trade is
the case that trade liberalization is associated with declining prices, so that
protectionism is inflationary. In line with this view, Romer (1993) postulates the
hypothesis that inflation is lower in small and open economies. The objective of
this study is to examine Romer’s hypothesis in Pakistan. For this purpose, we
have used multivariate cointegration and a vector error correction model. The
study covers the period from 1960 to 2007. The empirical findings under the
cointegration test show that there is a significant negative long-run relationship
between inflation and trade openness, which confirms the existence of Romer’s
hypothesis in Pakistan
