Can openness be an engine of sustained high growth rates and inflation?

The effects of increasing openness on the growth rates of output and of the price level are examined for Japan and Korea. The framework of analysis is a seven-variable vector autoregressive (VAR) model, and the effects of changes in openness are evaluated by computing impulse response functions (IRFs). For both countries, shocks to trade openness are found to have significant, negative effects on economic growth and inflation in the short run, but no longer-run effects. Openness measures in financial markets also have negative effects on economic growth and inflation in Korea, whereas the effects are not significant in Japan. The findings appear consistent with some models in which a domestic economy may suffer a loss due to increased openness of an economy.