Exchange Rates, Trade Openness and Inflation: Empirical Evidence from a(N)ARDL Model

This study investigated the linear and nonlinear effects of trade openness and the real effective exchange rate on inflation in China from 2003 to 2023. It examined the influence of external trade on inflation under rising global inflation and U.S.-China trade tensions. Four macroeconomic variables gross domestic product, money supply, crude oil prices, and interest rates were included as controls. Linear and nonlinear autoregressive distributed lag models were applied to explore short- and long-term impacts. The findings indicated a negative long-term relationship between trade openness and inflation. In the short term, the real effective exchange rate was negatively related to inflation. Nonlinear analysis revealed asymmetric inflation responses to trade openness, suggesting the importance of considering nonlinear dynamics in inflation modeling.