A Comparative Analysis of the Effects of Price Instability and Output Volatility on Economic Growth

Historical data indicate that the relationship between inflation and output does not align closely with the Philips curve's implications. Since the late 1980s, monetary policy has prioritized price stability as a key component of sustainable long-term economic growth. This emphasis reflects policymakers' assumption that output volatility poses less risk to long-term growth than inflation volatility, though this assumption lacks empirical support in the literature. To address this gap, this study investigates the impact of inflation and output volatility on economic growth by analyzing panel data from 1990 to 2020 across 68 countries. Fixed Effect Models are employed to account for country-specific, time-invariant factors that may influence the relationship between volatilities and growth. The findings reveal a significant negative impact of output volatility on economic growth, even when inflation volatility is accounted for, suggesting that policymakers should consider output volatility alongside price stability to support sustained economic growth.