The Impact of Trade Openness on Inflation in Pakistan

Abstract

This empirical study investigates the impact of trade openness on inflation in Pakistan during the periods of 1991-2023. In addition to trade openness, several control variables—unemployment, remittances, population growth, oil prices, and government expenditure—are incorporated to examine their influence on inflation. While employing, Augmented Dickey-Fuller (ADF) test, it is concluded that except inflation variable, the variables namely: trade openness, unemployment, remittances, population, oil price, and government expenditure are non-stationary at level. The ARDL bound test reveals a co-integration relationship between the variables, suggesting the existence of a long-run equilibrium. Moreover, the results also indicate that unemployment, population growth, oil prices and government expenditure have a positive effect on inflation, however, trade openness and remittances have a negative effect. The findings have significant policy implications, suggesting that managing factors such as unemployment, population growth, oil prices, and government expenditure is crucial for controlling inflation in Pakistan.