Openness and Inflation Volatility: A Case Study SAARC Country

Abstract

The objective of this research paper is to check the impact of openness on inflation volatility. The time period ranges from 1986-2014 by utilizing Panel data for SAARC countries. Four proxy variables are used to calculate openness by using Generalized Method of Moment (GMM) and Impulse Response for the existence of short run and long run relationship. GMM results indicates that the relation depend on the proxy variable being used in the model. Export to GDP and KOF index shows negative impact on inflation volatility while Trade to GDP ratio has significant positive impact on inflation volatility. The empirical study suggests that exports should be encouraged as it resulted in decreasing rate of inflation as along with imports inflation is also imported in terms of commodity price.