Openness to Trade and Inflation in Sweden: A Time-Series Study

Abstract

The relationship between inflation and openness to trade has yet to reach a consensus, and some refer to it as one of the modern “puzzles” of international economics. The conventional view (spillover hypothesis) documents a negative relationship between inflation and openness to trade, however many studies in this field have documented opposite effects, or, no effect at all. Our article revisits this relationship in Sweden using monthly time-series data from 1993 until 2024, using both robust regression and the Autoregressive Distributed Lag Model. We conclude that trade openness, i.e., imports to GDP, is not a determinant of domestic inflation in Sweden, neither in the long run nor in the short run. However, the ARDL model suggests strong inflationary effects from crude oil prices, indicating temporary commodity shocks, and significant disinflationary effects from increases in real GDP per capita. Our findings are consistent with Romer’s findings on a non-existing relationship in advanced economies. This suggests that, from a policy-making perspective, the Swedish Riksbank does not have to account for alterations in imports when conducting monetary policy. Lastly, we highlight important considerations for future studies, including using alternative measurements for inflation along with controlling for monopolization and centralization in labor markets.