Modelling the relationship between trade liberalisation and inflation

The paper examines the long run relationship between trade and inflation using time series data from Ghana for the period 1970–2011 in order to verify the hypothesis by Romer (1993) that states that there is negative relationship between trade openness and inflation. Johansen cointegration method and Granger causality test were used in analysing data using Stata and Gretl. The findings indicate significant stable negative long run relationship between trade openness and inflation in a model estimated with trade openness as the dependent variable and inflation as the explanatory variable with income as a control variable. There is bidirectional causality between trade openness and inflation. Opening trade could be useful in controlling inflation in Ghana as indicated in the literature. Policy makers should take into consideration when taking strategies control inflation in order to achieve economic stability. Future researchers should consider other proxies of inflation and trade openness.