There is another field of research, beyond my PhD on behavioral finance and retail credit markets, I’ve been working on recently. Me and Fernando Rey we have been working on a paper, ‘Playing with fire: Internal devaluation for the GIPSI countries’, where we suggest the policy European authorities are imposing to GIPSI countries exposes them to the risk of deflation, which would only make fiscal consolidation and sustainability of debt even harder to achieve.
We are still working on it, but a copy of the working paper is available now at SSRN.com, Abstract nº 2200176. We gratefully appreciate any comments you may make about it.
In the paper, we first analyze the main drivers of debt dynamics of GIPSI vs Eurozone core countries during the last decade, to show the effects of fiscal balance, growth and inflation. Then we implement a scenario analysis to analyze the effectiveness of a coordinated policy among Eurozone members, where core countries accept a 3% target for inflation and reduce the pace of their fiscal consolidation, while GIPSI countries focus on fiscal consolidation with a low (but positive) level of inflation. This coordinated policy might be a better option as it (i) increases the competitiveness of GIPSI countries while avoiding the risks of deflation, (ii) ensures stability of debt for both groups of countries without imposing an excessive inflation target from EU core countries, and (iii) introduces the possibility of a fiscal stimulus (of about 1% of core countries’ GDP).
(by the way, there at SSRN.com you may also find a copy of my paper on behavioral finance and retail credit markets. The definitive version is available under the Abstract nº 2198345 , and it is now under review for publication).