Trade and Institutional Inertia

The importance of institutions and their relationship with macroeconomic variables has attracted the attention of many researchers. The existing literature indicates a significant relationship between institutions and the economic environment, which is strengthened by trade openness. Also, the economic literature shows that the phenomenon of inertia is ambiguous and like a double-edged sword. It also seems that the existence of inertia, especially for developing countries, leads to suboptimal macroeconomic and foreign trade performance. By understanding these conditions, this chapter examines the relationship between foreign trade and institutional inertia. To answer this question while reviewing the literature, a simple theoretical model based on Gartner (Macroeconomics under flexible exchange rates. Harvester Wheatsheaf, New York, 1993) has been used. The findings show that there is a significant relationship between foreign trade and institutional inertia. Accordingly, although institutional change and foreign trade can move independently of each other, if they move together and this issue is addressed by policymakers, it can lead to a stronger relationship between institutions and economic performance.