ISSN 2039-2117 (online) ISSN 2039-9340 (print) Mediterranean Journal of Social Sciences Vol 8 No 6 November 2017 171 Research Article © 2017 Zombe et.al. This is an open access article licensed under the Creative Commons Attribution-NonCommercial-NoDerivs License (http://creativecommons.org/licenses/by-nc-nd/3.0/). Investigating the Causal Relationship between Inflation and Trade Openness using Toda–Yamamoto Approach: Evidence from Zambia Chibvalo Zombe 1 Lincoln Daka 1 Christopher Phiri 1 Oliver Kaonga 2 Francis Chibwe 3 Venkatesh Seshamani 2 1 Department of Economics, Copperbelt University, Kitwe, Zambia 2 Department of Economics, University of Zambia, Lusaka, Zambia 3 Rural Electrification Authority, Lusaka, Zambia Doi: 10.1515/mjss-2017-0054 Abstract The paper examines whether a significant relationship exists between inflation and trade openness in Zambia over the period 1985 to 2015. We use the Toda-Yamamoto approach to Granger causality to test for a causal relationship between inflation and trade openness. The results establish a bi-directional causality between inflation and trade openness. Further, there exists a positive relationship between inflation and trade openness in Zambia. Our findings stress the importance for central banks to understand the consequences of international trade for domestic inflation. Keywords: inflation, trade openness, Toda-Yamamoto approach to Granger causality Introduction 1. For many development theorists, international trade is a key variable in the development process of a country. It is believed that increased trade enhances export earnings, promotes industrialization, and encourages diversification of the economy (Ndulo and Mudenda, 2004). This view has been supported by the endogenous growth theory that is typically based on models of endogenous technological change. The theory shows that trade openness provides access to imported inputs embodying new technology, raises the returns on innovations of domestic producers by increasing the effective size of the market they face, and facilitates a country’s specialization in research- intensive production. Thus, a more open economy faces more competition from its trading partners that stimulates productivity, and this kindles economic growth (Romer, 1989). Based on the benefits of international trade highlighted above, many developing countries embarked on an ambitious program to liberalize their economies in the 1980s. As a result, unweighted tariffs reduced in developing countries from 34% between 1980 and 1983 to 15% between 1997 and 1999 (United Nations Conference on Trade and Development, 2004). Although the outcomes of the liberalization program on individual economies have been mixed (depending on the nature, structure, and degree of openness of the economy), a common observation during