Examining impact of inflation and inflation volatility on economic growth: Evidence from European Union economies

Pappas, Anastasios; Boukas, Nikolaos Article Examining impact of inflation and inflation volatility on economic growth: Evidence from European Union economies Economies Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Pappas, Anastasios; Boukas, Nikolaos (2025) : Examining impact of inflation and inflation volatility on economic growth: Evidence from European Union economies, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 13, Iss. 2, pp. 1-18, https://doi.org/10.3390/economies13020031 This Version is available at: https://hdl.handle.net/10419/329311 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Academic Editor: Gabriela Dobrota Received: 31 December 2024 Revised: 22 January 2025 Accepted: 24 January 2025 Published: 29 January 2025 Citation: Pappas, A., & Boukas, N. (2025). Examining Impact of Inflation and Inflation Volatility on Economic Growth: Evidence from European Union Economies. Economies,13(2), 31. https://doi.org/10.3390/ economies13020031 Copyright: © 2025 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/ licenses/by/4.0/). Article Examining Impact of Inflation and Inflation Volatility on Economic Growth: Evidence from European Union Economies Anastasios Pappas 1,* and Nikolaos Boukas 2 1Hellenic Fiscal Council, Greece and Department of Economics, National and Kapodistrian University of Athens, 15772 Athens, Greece 2Center for Sustainable Management for Tourism, Sport and Events (CESMATSE), European University Cyprus, Nicosia 22006, Cyprus; [email protected] *Correspondence: [email protected] Abstract: Examining the economies of the European Union from 2000 to 2023, we have found no strong evidence that the inflation rate has a negative impact on economic growth. In contrast, in line with conventional economic theory, higher interest rates are associated with lower economic growth. The results remain consistent even after controlling for various control variables, non-linearities and endogeneity issues. These findings suggest that an aggressive tightening of monetary policy in the euro area, aimed at rapidly bringing inflation under control, could actually be detrimental to economic growth. Since the negative effects of monetary tightening on growth are clear, while the benefits of rapidly reducing inflation on economic growth are ambiguous, the European Central Bank must be cautious about both the intensity and the duration of monetary tightening. Keywords: economic growth; inflation; inflation volatility; interest rates; European Union; panel data JEL Classification: E31; E40; E52; E58; O40 1. Introduction The recent inflationary episode in the European Union compelled the European Central Bank (ECB) to significantly tighten its monetary policy, to counteract inflationary pressures. Over a fourteen-month period, from July 2022 to September 2023, the ECB increased its key interest rates by 450 basis points. This aggressive monetary tightening raises concerns about its potential adverse impact on economic growth, given that higher interest rates tend to negatively influence investments and consumption. Conversely, a relatively high inflation rate may adversely affect economic activity. Apart from the inflation rate, economic activity may be negatively influenced by inflation volatility, as highlighted by Friedman (1977). In this respect, as far as monetary policy is concerned, the ECB is confronted with a dilemma, given that both high interest rates and inflation or inflation volatility have the potential to hinder economic growth. This study presents evidence regarding the relationship between inflation rate, inflation volatility, and growth in EU economies from 2000 to 2023. In addition, this study focuses on the effects of high interest rates on economic growth in Europe. The econometric results suggest that when focusing exclusively on economic growth, there is no trade-off in the ECB’s policy choices. We find no statistically significant evidence indicating that the inflation rate affected growth in European economies during the period 2000–2023. However, some evidence that inflation volatility negatively affects growth exists. Furthermore, higher Economies 2025,13, 31 https://doi.org/10.3390/economies13020031 Economies 2025,13, 31 2 of 18 interest rates are strongly related to lower real gross domestic product (GDP) growth for European economies during the aforementioned period. This study makes two significant contributions to the existing literature. First, it sheds light on an area that has not yet been extensively investigated: the nexus between inflation rate and inflation volatility with real gross domestic product (GDP) growth in European Union economies after the establishment of the ECB. Second, this study contributes to the ongoing debate regarding the level of ECB interest rates. In the current circumstances where the ECB is confronted with the dilemma of either maintaining high interest rates or reducing them, it is crucial to consider, as per the findings of this study, that while high interest rates harm economic growth, the inflation rate does not seem to significantly affect real economic activity. Therefore, a growth-friendly policy should align with a trajectory of lower interest rates. The remainder of this paper is organized as follows: Section 2reviews the relevant literature. Section 3provides an overview of the variables, data, and econometric methodology employed in this study. Section 4presents the empirical findings derived from both linear and non-linear panel data models. Section 5explores the robustness of the primary findings, conducting a series of rigorous robustness tests. Finally, Section 6concludes the paper. 2. Literature Review 2.1. Early Studies on Relationship Between Inflation and Growth The relationship between inflation and economic growth has been extensively investigated for decades, beginning in the 1960s 1 . After the 1980s, interest in this relationship was rekindled, leading to the publication of a significant number of research papers attempting to explore whether inflation and growth are directly or inversely associated. Fischer (1993) finds evidence that inflation may harm growth by reducing investment and the rate of productivity growth. Nevertheless, these results are valid only for very high inflation episodes. However, the study does not find evidence that low inflation is a clear-cut path for high growth, even over long periods. Barro (1996) provides evidence of a negative relationship between inflation and growth through a channel of lower investments. However, these results hold for high inflation experiences, and the magnitudes of the adverse effects on growth are quite mild. Bruno (1995) and Bruno and Easterly (1996,1998) also investigate the relationship between growth and inflation. Their findings suggest that this relationship turns negative only when high-frequency data are examined, and specifically, only when the inflation rate surpasses a particular threshold, which they propose to be 40% annually. The main finding in the aforementioned studies is that they reveal the negative effects of inflation on growth, particularly at high inflation rates and notably well beyond a double-digit range. All these findings can be summed up by Rogoff’s (2003, p. 79) phrase that inflation surpassing the 40 percent mark can be deemed acutely damaging. It should be noted that a significant amount of research was conducted during the 1990s, such as those by Levine and Renelt (1992), Levine and Zervos (1993), and Sala-I-Martin (1997a), which failed to establish a robust relationship between inflation and economic growth. However, during the same period, another series of studies highlighted the potential negative impact of inflation rates on growth, even at lower levels. Using a panel of 23 industrial countries, Burdekin et al. (1994) estimated that a swift shift from zero inflation to 10% inflation could reduce the growth rate by one to two percentage points. Sarel (1995) lowered this threshold to 8%. By examining 87 economies during the period 1970–1990, it was concluded that the relationship between inflation and economic growth is non-linear. He finds that when inflation is low (below 8%), the effect on growth is not significantly negative; in fact, it may even be slightly positive. However, above the structural break of Economies 2025,13, 31 3 of 18 the 8% annual inflation rate, the effect becomes negative. Gylfason and Herbertsson (2001), employing panel regressions for 170 countries from 1960 to 1992, identified a threshold at which inflation rates exceeding 10% to 20% per year generally have an adverse impact on economic growth. Beyond this threshold, the effect of inflation on growth becomes negative. Furthermore, Ghosh and Phillips (1998) further reduced this threshold to 5%, arguing that the moderate or intermediate inflation range—perhaps 5–30 percent per year—negatively affects economic growth. 2.2. Inflation and Growth: More Recent Empirical Evidence In more recent empirical studies, there have been thresholds above which inflation has a negative impact on economic growth. Arawatari et al. (2018) find that when inflation exceeds a threshold level of 15–20%, a sharp decline in the long-run growth rate of income is observed. Similarly, He (2023) identifies a zero marginal effect on growth at 5% inflation using ordinary least squares (OLS) estimation and at 3% using instrumental variables (IVs) estimation. Moreover, the inflation threshold varies according to the group of countries analyzed. Burdekin et al. (2004) criticize the grouping of industrial and developing economies when examining the relationship between inflation and growth, suggesting that it may lead to unreliable results. Their paper concludes that the threshold where inflation becomes harmful for growth is lower than 20–40%; using a linear specification, they found a higher threshold for industrial countries (8%) than for developing countries (3%). Furthermore, Eggoh and Khan (2014) confirm the sensitivity of the relationship between inflation and growth to the choice of country groups. They find a threshold of 12.4% annual inflation for the global set of 102 developing and developed economies. However, this threshold varied among different groups of economies: 3.4% for advanced economies, 10% for uppermiddle-income economies, 12% for middle-income economies, and approximately 20% for low-income economies. Similarly, Espinoza et al. (2010) placed a threshold above 10% for developing countries after examining a panel of 165 countries and data for 1960– 2007. For advanced economies, the threshold is found to be much lower. Ghossoub (2023) also identifies a threshold where the correlation between inflation and economic growth becomes negative. This threshold is higher for developing economies compared to advanced ones, due to more concentrated banking systems and higher regulation in developing countries. The existence of a threshold means that inflation below a certain turning point may be beneficial for economic growth. Using over 100 years of U.S. data, Ahmed and Rogers (2000) find that the effects of relatively low inflation on output are positive. Pollin and Zhu (2006), analyzing a set of 80 countries between 1961 and 2000, observed that higher inflation is associated with moderate gains in gross domestic product (GDP) growth up to a threshold of approximately 15–18%. Recently, Zhou (2019) proposed a theoretical explanation of a potential channel through which moderate inflation could have a positive effect on economic growth through investment. In this regard, inflation may have a positive effect on growth by reducing the liquidity risk of investment projects. In addition, Huang et al. (2021) explain that inflation can have a positive effect on growth if variety-expanding R&D (entry) is subject to a cash-in-advance (CIA) constraint. A CIA constraint requires cash to be available before certain activities, such as consumption, production, or R&D investment, can take place. This constraint affects how inflation influences economic growth, as described in the Schumpeterian growth model. Furthermore, Yilmazkuday (2021) finds that inflation may result in higher long-run growth especially in countries with weaker institutions. When these countries have limited access to direct capital (like Economies 2025,13, 31 4 of 18 investments from private sectors or foreign investors), increasing the money supply can act as a substitute and boost real investment in the economy. 2.3. Inflation Volatility and Growth In addition to the inflation rate, inflation volatility was examined for its potential adverse effects on growth. As mentioned in the Introduction, Friedman (1977) stressed that inflation volatility, rather than inflation rate, adversely affects economic growth. Inflation volatility could detrimentally affect economic activity by increasing the recorded rate of unemployment. Empirical research has explored these theoretical arguments. Judson and Orphanides (1999) examined a panel of 119 countries over the period 1959–1992 and concluded that inflation volatility was robustly and significantly negatively correlated with income growth across inflation levels and country type. Apergis (2005) investigated the impact of inflation uncertainty on the growth of OECD countries from 1969 to 1999 and found that the effects are negative. Accordingly, Fountas et al. (2006) confirmed the detrimental effect of inflation on real growth through the nominal uncertainty channel for G7 countries. Friedman’s (1977) hypothesis was recently validated by Živkov et al. (2020), who discovered a negative impact of inflation uncertainty on gross domestic product (GDP) growth in eight Central and Eastern European countries. 2.4. Inflation and Growth in European Union Economies This current literature review provides broad findings. First, it is often observed that there is a relatively high threshold, typically above two digits in inflation rates, where inflation turns negative for growth when grouping economies with different characteristics, such as developing and developed countries. Second, the formation of groups with similar economic characteristics may have contributed to more robust and conclusive results. Third, inflation volatility, and not just a high inflation rate, may have detrimental effects on economic growth. Therefore, focusing on EU economies may yield more robust findings regarding the nexus between inflation, inflation volatility, and growth within a group of countries sharing similar economic characteristics, steering clear hyperinflation observations 2 and operating under the same central bank’s monetary policy3. To the best of our knowledge, the literature on inflation, inflation volatility, and growth exclusively focused on European countries is relatively scarce. Pintilescu et al. (2014) examined ten European emerging economies for the period 1990 to 2013, aiming to investigate the impact of inflation uncertainty on output growth. Their research has revealed only a few significant causal relationships. Specifically, a relationship between inflation volatility and output growth was identified in only two of the ten countries. Cuaresma and Silgoner (2014) examined the impact of inflation on growth for a panel of 14 European Union countries, specifically from 1960 to 1999, in the years preceding monetary unification. Their results validated the hypothesis that the relationship between inflation and growth is positive for very low inflation, insignificant thereafter, and negative for high two digit inflation. More recently, Živkov et al. (2020) discovered that inflation in eight Central and Eastern European countries has an indirect impact on gross domestic product (GDP) growth via inflation uncertainty. Economies 2025,13, 31 5 of 18 3. Methodology and Data Set 3.1. Linear Specification The growth regression equation with country fixed effects and year dummies is as follows: Gj,t=β1×Yj,t+β2×Zj,t+β3×Vj,t+β4×Xj,t+δj+γt+εj,t(1) where Y j,t is a vector of variables that always appear in the regressions based on the standard growth literature (Levine & Renelt,1992;Levine & Zervos,1993;Barro,1991,1996; Sala-I-Martin,1997a,1997b;Reinhart & Rogoff,2010): (i) trade openness, measured as the ratio of imports plus exports to gross domestic product (XM); (ii) investment, measured as the ratio of gross fixed capital formation to gross domestic product (Inv); and (iii) public debt to gross domestic product (Debt) as a fiscal policy indicator. Furthermore, Zj,t is the first variable of interest, the inflation rate, measured by the annual rate of change in the Harmonized Index Of Consumer Prices (HICP); and Vj,t is the second variable of interest and inflation rate volatility. Inflation rate volatility is measured in two ways. First, it is measured as the moving averages of the standard deviation of year-on-year inflation rates over three-year periods (HICP_V) (Hafer,1986;Davis & Kanago, 2000;Blanchard & Simon,2001). To capture the extent of possible short-term fluctuations in inflation, an alternative measure is also considered: the moving average of the standard deviation of monthly intra-year inflation (HICP_V_alt) (Judson & Orphanides,1999)4. In addition, X j,t represents a vector that includes one additional control variable selected from a pool of N variables, which are also considered in the growth literature. The pool consists of the following variables: (i) monetary conditions (King & Watson, 1996;Arestis & Demetriades,1997) proxied by long-term interest rates and specifically the average annual yield of 10-year government bonds (LTIR); (ii) credit expansion (King & Levine,1993;De Gregorio & Guidotti,1995;Sala-I-Martin,1997a,1997b) (Credit) proxied by the total credit to the private non-financial sector as an annual rate of change; (iii) the size of the government (Barro,1996,2003;Burdekin et al.,2004) measured by the total expenditures of the general government as a percentage of gross domestic product (GG); (iv) expenditures on research and development activities for both the private and public sectors as a share of gross domestic product (R&D) (Zachariadis,2004;Pessoa,2010); (v) a measure of education (Barro,1991,1996;Bils & Klenow,2000), which is the upper secondary and post-secondary non-tertiary education as a percentage of total population, from 15 to 64 years (EDU); and (vi) an index measuring the quality of institutions (Hall & Jones,1999; Barro,1996,2003;Rodrik et al.,2004) (Institutions), which is the sum of the scores of the six governance indicators of the World Bank. It should be noted that the choice of control is guided by specific considerations. The purpose here is not to present an exhaustive account of the determinants of growth, but rather to isolate the effects of inflation and inflation volatility on economic growth. The adoption of a parsimonious specification that accounts for unobservable heterogeneity may be sufficient to satisfactorily address the central research question. The dependent variable, G j,t , is the annual rate of change (percentage) in real gross domestic product (GDP) per capita. δi are country fixed effects that account for crosssectional unobserved heterogeneity, γt are time fixed effects 5 to capture aggregate time shocks, and εi,tis the idiosyncratic error term. The research covers the period from 2000 to 2023 using annual data with unbalanced panels. The data set is primarily sourced from the EUROSTAT database, with the exception of the credit expansion variable (Credit), obtained from the Federal Reserve Bank of Saint Economies 2025,13, 31 6 of 18 Louis, and the quality of institutions variable (Institutions), sourced from the World Bank’s Worldwide Governance Indicators (see Table A1 in Appendix A). 3.2. Non-Linear Specifications To capture the potential non-linearities between the relationship of inflation, inflation volatility, and growth, two alternative specifications are employed. First, following Pollin and Zhu (2006), a squared term of the inflation rate is introduced in the model (Z2j,t). Gj,t=β1×Yj,t+β2×Zj,t+β3×Z Squaredj,t+β4×Vj,t+β5×Xj,t+δj+γt+εj,t(2) Introducing non-linearity into the model by including the squared inflation rate allowed the regression equation to be estimated as a second-degree polynomial. This approach captures changes in slopes that are dependent on variations in the independent variable. Consequently, the slope of the estimating equation can vary in response to fluctuations in the inflation rate, facilitating the identification of turning points in the relationship between the inflation rate and economic growth. Second, the interaction between the inflation rate and inflation volatility is examined by modifying the baseline model by introducing the interaction term (β4×Zj,t ×Vj,t. Gj,t=β1×Yj,t+β2×Zj,t+β3×Vj,t+β4×Zj,t×Vj,t+β5×Xj,t+δj+γt+εj,t(3) The rationale for including the interaction term is that individually relatively high inflation and inflation volatility may not significantly affect real output. However, when combined, inflation and inflation volatility may increase the impact on the economy. A positive (negative) and statistically significant coefficient β4 indicates that the combination of inflation rate and inflation volatility amplifies (dampens) the effect of inflation and inflation volatility on economic growth. 4. Results Table 1provides the preliminary results concerning the relationship between inflation, inflation volatility, and economic growth. Concerning the impact of the inflation rate on gross domestic product (GDP) growth, no statistically significant findings were observed. Similarly, there is no evidence of a significant relationship between inflation volatility and growth across the various specifications. Notably, in only 1 out of 14 cases, when credit growth is introduced as an additional control variable, the volatility of inflation (measured as the standard deviation of year-on-year inflation rates over a three-year period, –HICP_V) is found to be negatively and significantly (at the 10% significance level) associated with gross domestic product growth in European economies. While these linear specifications may not be theoretically the most preferred, they demonstrate the isolated effects of inflation rate, inflation volatility, and other control variables on growth before addressing non-linearity issues. Additionally, control variables such as investments and trade openness, which are standard in the growth literature, are consistently found to have a positive and statistically significant effect on gross domestic product growth. Interestingly, the debt-to-GDP ratio is also positively associated with gross domestic product growth, suggesting that during the period 2000–2023, growth coincided with public debt accumulation and did not hinder EU economies from expanding. Regarding the remaining control variables, long-term interest rates (LTIRs) and general government expenditures (GG) were both negatively associated with gross domestic product growth. In contrast, the level of education (EDU) was found to be positively related to gross domestic product growth. Economies 2025,13, 31 7 of 18 Table 1. Baseline model results. Dependent: GDP_C (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) Constant −3.903 * −3.668 0.835 0.973 −4.811 * −4.971 * 7.63 *** 8.36 −4.755 * −4.506 * − 11.137 *** − 10.998 *** −3.328 −3.15 (1.971) (2.175) (1.85) (1.86) (2.582) (2.817) (2.216) (2.322) (2.443) (2.587) (2.586) (2.773) (2.024) (2.193) HICP −0.1 −0.139 −0. 098 −0.137 −0.116 −0.137 −0.097 −0.116 −0.108 −0.153 −0.071 −0.099 −0.097 −0.136 (0.084) (0.104) (0.093) (0.119) (0.091) (0.105) (0.079) (0.093) (0.09) (0.107) (0.084) (0.098) (0.083) (0.102) HICP_V −0.333 −0. 338 −0.548 * −0.259 −0.358 −0.306 −0.336 (0.255) (0.245) (0.269) (0.224) (0.259) (0.248) (0.083) HICP_V_alt −0.934 −0.233 −0.781 −0.976 −0.901 −1.063 −0.9348 (0.828) (0.729) (0.926) (0.764) (0.80) (0.711) (0.821) Inv 0.216 *** 0.227 *** 0.195 *** 0.200 *** 0.225 ** 0.23 ** 0.18 ** 0.186 ** 0.219 ** 0.231 ** 0.206 *** 0.215 *** 0.216 *** 0.226 ** (0.065) (0.072) (0.062) (0.066) (0.089) (0.092) (0.071) (0.01) (0.08) (0.086) (0.064) (0.07) (0.065) (0.072) XM 0.032 ** 0.029 ** 0.021 * 0.019 * 0.034 ** 0.033 ** 0.021 ** 0.018 * 0.033 ** 0.03 ** 0.035 *** 0.032 *** 0.032 ** 0.03 ** (0.012) (0.012) (0.011) (0.011) (0.016) (0.016) (0.01) (0.010) (0.012) (0.011) (0.01) (0.009) (0.012) (0.012) Debt 0.022 * 0.019 * 0.037 *** 0. 035 *** 0.023 ** 0.02 ** 0.040 *** 0.038 *** 0.023 * 0.019 0.015 0.013 0.021 * 0.018 * (0.012) (0.01) (0.012) (0.011) (0.01) (0.009) (0.011) (0.01) (0.013) (0.011) (0.012) (0.011) (0.011) (0.01) LTIRs −0.553 *** −0.588 *** (0.187) (0.093) Credit 0.034 0.033 (0.022) (0.016) GG −0.239 *** −0.248 *** (0.042) (0.046) R&D 0.677 0.604 (0.792) (0.791) Edu 0.158 *** 0.161 *** (0.039) (0.041) Institutions 0.09 −0.082 (0.156) (0.147) Observations 643 643 627 627 541 541 643 643 632 632 637 637 643 643 Countries 27 27 27 27 24 24 27 27 27 27 27 27 27 27 R-squared 0.613 0.610 0.653 0.650 0.629 0.621 0.639 0.639 0.621 0.617 0.633 0.631 0.614 0.610 Country FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Year FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Note: This table presents the estimation results for the baseline model described in Equation (1). Robust standard errors are reported in the parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10% levels, respectively. Economies 2025,13, 31 8 of 18 Table 2presents the results of the non-linear models (Equations (2) and (3)). Given that one of the primary objectives of this study is to center on the European Central Bank’s policy regarding inflation and considering that long-term interest rates were found to be significant in the linear specifications, we exclusively included this variable as an additional control variable, alongside the other three standard control variables (investments, trade openness, and public debt to gross domestic product ratio) 6 . The inflation rate remains a statistically insignificant determinant of growth even when its quadratic term is introduced into the model. The same holds true for the two alternative inflation volatility variables. When exploring the potential interaction between inflation and inflation volatility in the first case, no significant difference was observed. Interestingly, when delving into the interaction between inflation and intra-year inflation volatility, both variables were not found to be significantly associated with growth. Table 2. Non-linear model results. Dependent: GDP_C (1) (2) (3) (4) Constant 0.591 0.513 0.571 −0.455 (1.909) (1.959) (1.821) (1.922) HICP −0.019 −0.019 0.017 0.022 (0.154) (0.166) (0.106) (0.167) HICPˆ2 −0.006 −0.011 (0.007) (0.008) HICP_V −0.293 −0.175 (0.246) (0.252) HICP_V_alt −0.231 0.749 (0.717) (0.79) HICP* HICP_V −0.026 ** (0.011) HICP* HICP_V_alt −0.214 ** (0.255) Inv 0.194 *** 0.196 *** 0.186 *** 0.196 *** (0.061) (0.062) (0.059) (0.06) XM 0.021 * 0.02 * 0.021 * 0.020 * (0.011) (0.011) (0.012) (0.011) Debt 0.038 *** 0.037 *** 0.038 *** 0.035 *** (0.012) (0.012) (0.012) (0.011) LTIRs −0.555 *** −0.584 *** −0.572 *** −0.605 *** (0.077) (0.093) (0.082) (0.093) Observations 627 627 627 627 Countries 27 27 27 27 R-squared 0.654 0.651 0.655 0.653 Country FE Yes Yes Yes Yes Year FE Yes Yes Yes Yes Note: This table presents the estimation results for the non-linear models described in Equations (2) and (3). Robust standard errors are reported in the parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10% levels, respectively. Overall, the results from both linear and non-linear specifications did not succeed in identifying a robust negative relationship between inflation or inflation volatility and economic growth for EU economies during the period 2000–2023. Economies 2025,13, 31 15 of 18 Table A2. Correlation matrix. Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (1) GDP_C 1.000 (2) HICP 0.159 * 1.000 (3) HICP_V −0.022 0.675 * 1.000 (4) HICP_V_alt −0.135 * 0.195 * 0.203 * 1.000 (5) Debt −0.247 * −0.216 * −0.129 * 0.365 * 1.000 (6) Inv 0.244 * 0.209 * 0.030 −0.221 * −0.471 * 1.000 (7) XM 0.077 −0.014 0.042 0.273 * −0.273 * −0.037 1.000 (8) LTIRs −0.118 * 0.228 * 0.180 * 0.091 * 0.050 −0.029 −0.231 * 1.000 (9) Credit 0.178 * 0.108 * −0.116 * −0.164 * −0.234 * 0.237 * −0.014 0.160 * 1.000 (10) GG −0.426 * −0.182 * −0.140 * −0.012 0.521 * −0.303 * −0.339 * −0.010 −0.138 * 1.000 (11) R&D −0.238 * −0.174 * −0.186 * −0.205 * 0.102 * −0.028 −0.155 * −0.380 * −0.086 * 0.607 * 1.000 (12) Edu 0.191 * 0.163 * 0.179 * −0.413 * −0.349 * 0.213 * −0.141 * 0.087 * 0.057 −0.080 * −0.068 1.000 (13) Institutions −0.178 * −0.255 * −0.252 * −0.099 * −0.087 * −0.001 0.234 * −0.367 * 0.065 0.254 * 0.663 * −0.301 * 1.000 (14) Lpop −0.101 * 0.006 −0.066 −0.226 * 0.376 * −0.066 −0.686 * 0.036 −0.037 0.347 * 0.266 * 0.085 * −0.104 * 1.000 (15) Gov_chan −0.011 0.005 0.052 −0.074 −0.009 0.058 −0.097 * 0.071 −0.042 0.043 −0.034 0.103 * −0.086 * 0.079 1.000 Note: * denotes statistical significance at maximum level of significance of 5%. Economies 2025,13, 31 16 of 18 Table A3. Variance inflation factor. VIF 1/VIF R&D 3.69 0.271 Debt 3.406 0.294 GG 2.874 0.348 Institutions 2.817 0.355 XM 2.666 0.375 Lpop 2.666 0.375 HICP_V_alt 2.108 0.474 HICP 1.858 0.538 LTIRs 1.694 0.59 Inv 1.683 0.594 Edu 1.654 0.605 HICP_V 1.522 0.657 Credit 1.225 0.816 Gov_chan 1.041 0.96 Mean VIF 2.208 Note: This table shows the Variance Inflation Factor (VIF) values for the predictor variables. The VIF values measure the extent of multicollinearity among the predictor variables in the regression model. A VIF value greater than 10 typically indicates high multicollinearity, which can affect the stability and interpretation of the regression coefficients. In our analysis, all VIF values are below 10, with a mean VIF of 2.21, indicating no serious multicollinearity issues. The 1/VIF values (tolerance values) are the reciprocal of the VIF values. In our results, the tolerance values are all above 0.1, further confirming that multicollinearity is not a significant concern in our models. Overall, these results suggest that the predictor variables are sufficiently independent of each other, allowing for the reliable estimation of the regression coefficients and valid interpretation of the model. Notes 1See for instance Phillips (1962), Sidrauski (1967), Thirlwall and Barton (1971), and Dornbusch and Frenkel (1973). 2 The sample used in this study has only one observation of inflation above 40% annually out of 643 observations. In this manner, the concern raised by Bruno and Easterly (1998), suggesting that the negative correlation between inflation and economic growth is attributed to hyperinflation episodes, is overcome. 3 Our sample comprises all EU economies, regardless of whether they have adopted the euro. The research operates under the assumption that the European Central Bank’s (ECB’s) monetary policy significantly influences EU countries that do not participate in the Economic and Monetary Union (EMU). However, the results are also controlled specifically for EMU countries. 4 The inclusion of both the inflation rate and inflation volatility in the same regression may raise concerns about potential multicollinearity problems. However, as shown in Tables A2 and A3, the correlation between the variables is quite low, indicating that a serious multicollinearity problem is not present. Additionally, separated regressions were run one with inflation and another one with inflation volatility instead of putting these two variables in a single regression. Due to space considerations, these results are not presented; however, they are available upon request. 5Robust standard errors are employed to address any potential heteroskedasticity and autocorrelation in the residuals. 6 The additional control variables were also examined following the methodology of linear specifications. The results remained consistent even when the supplementary control variables were introduced to the non-linear models. Due to space considerations, these results are not presented; however, they are available upon request. 7 The study employs the dynamic GMM specification and the LSDVC estimator to avoid the Nickell bias (Nickell,1981) that may arise when running a dynamic fixed effects panel regression, especially in this case where the number of cross-sections is larger than the time dimension. 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