Trade Openness And Inflation: Panel Data Evidence For The Caribbean

Abstract

High rates of inflation are a recurrent problem in Caribbean countries. Statistics show that small open developing economies, like those in the Caribbean, are relatively open when compared to more developed countries. Romer (1993) noted that global developments negatively influence inflation thus causing a negative link with trade openness. This paper re-examined this relationship for 8 Caribbean countries over a 30-year period. The validity of Romers (1993) main result is investigated using a modern panel data approach. The results showed that openness positively influences inflation and validated the notion that the Caribbean countries are vulnerable to external shocks.