Does Inflation Volatility Affect Economic Growth? Evidence from Developed and Developing Economies

Abstract

This study examines the impact of inflation volatility on GDP growth across selected developed (Japan, USA) and developing (India, Nigeria) economies over the period 2010–2024. Using annual macroeconomic data from the World Bank, inflation volatility is measured as the 3-year and 5-year rolling standard deviations of consumer price inflation, while annual inflation rates are included to control for level effects. The analysis employs a fixed-effects panel regression framework in Stata to estimate the relationship between inflation volatility and GDP growth, controlling country-specific heterogeneity. Visualizations and trend analyses are generated using Python to provide descriptive insights across development status, volatility regimes, and temporal periods. Baseline results indicate that moderate inflation volatility positively influences GDP growth, particularly in developing countries and high-volatility environments, whereas sustained high inflation exerts a negative effect. Interaction and subgroup analyses reveal that the post-COVID period (2020–2024) saw elevated inflation and volatility, but the core relationship between inflation variability and economic growth remains largely unchanged. Robustness checks using Driscoll-Kraay standard errors and lagged volatility measures confirm the stability of the findings, highlighting that the effects of inflation uncertainty are context-dependent. These results underscore the nuanced role of inflation volatility in shaping macroeconomic outcomes and suggest that policymakers should account for country-specific volatility regimes when designing growth-stabilizing policies. The study contributes to the literature by providing comparative evidence from both developed and developing economies and by examining the potential moderating influence of the COVID-19 period on growth dynamics.