Inflation Volatility and Economic Expansion in Emerging Economies: Evidence from the Global Recovery PhaseInflation Volatility and Economic Expansion in Emerging Economies: Evidence from the Global Recovery Phase

Abstract

Inflation volatility represents one of the most consequential macroeconomic challenges confronting emerging market economies during periods of external shock recovery, influencing investment decisions, monetary policy credibility, and long-run economic growth through complex, nonlinear transmission mechanisms that standard linear models inadequately capture. This paper investigates the dynamic relationship between inflation volatility and economic expansion across a panel of 42 emerging market economies during the global recovery phase spanning 2020–2024, a period characterized by unprecedented monetary stimulus, supply chain disruptions, commodity price shocks, and divergent monetary policy normalization trajectories that generated exceptional variation in inflation-growth dynamics across the emerging market universe. Employing a panel vector autoregression framework augmented with regime-switching specifications and threshold cointegration analysis, we document that inflation volatility exerts a statistically significant and economically meaningful negative effect on economic growth, but that this relationship is heterogeneous across income levels, monetary policy frameworks, financial development stages, and commodity export dependence. The evidence reveals a threshold inflation volatility level above which growth penalties are sharply amplified, consistent with theoretical models of irreversible investment under uncertainty. Inflation targeting frameworks are found to significantly attenuate the growth costs of inflation volatility, providing empirical support for the institutional view of monetary policy framework adoption. These findings carry important implications for macroeconomic policy design in the post-recovery period, particularly regarding the sequencing of monetary policy normalization and the prioritization of inflation volatility reduction relative to output stabilization in emerging market central bank mandates.