Regulatory Volatility and Economic Growth in Europe: Heterogeneous Effects Across Institutional Development Stages

Institutions are widely recognized as a key determinant of long-run economic growth, yet empirical research has predominantly focused on institutional levels rather than institutional stability over time. This study examines whether regulatory volatility—conceptualized as a dynamic dimension of institutional stability—is associated with economic growth across 32 European economies over the period 2004–2023. Regulatory volatility is measured using rolling five-year standard deviations of the Regulatory Quality indicator from the Worldwide Governance Indicators, allowing institutional stability to vary within countries over time while avoiding forward-looking bias. The empirical strategy relies on fixed-effects panel models with Driscoll–Kraay standard errors to account for unobserved heterogeneity and cross-sectional dependence. The results indicate that regulatory volatility is negatively associated with economic growth within European Union economies, while the relationship appears weaker and heterogeneous in Western Balkan transition countries. A one standard deviation increase in regulatory volatility is associated with an economically meaningful reduction in annual per capita growth. These findings suggest that sustainable economic performance may depend not only on the level of institutional quality but also on the stability and predictability of regulatory frameworks over time.