This study investigates the long-run structural relationships and short-run transitional dynamics of sovereign debt thresholds and inflation dynamics across the Eurozone periphery (GIPS — Greece, Italy, Portugal, and Spain) over the period 2010Q1–2025Q4. The study include inflation rate (INFLR) as the dependent variable, alongside a robust set of independent variables: the Output Gap (TOG), the Sovereign Debt Load (SDL), the natural logarithm of Trade Openness (lnTOP), and the European Central Bank’s centralized Monetary Policy Rate (MPR). Secondary macro-level data for these variables are gathered from recognized institutional data sources, specifically Eurostat’s Government Finance Statistics, the European Central Bank (ECB) Statistical Data Warehouse, and the International Financial Statistics database of the International Monetary Fund (IMF). Methodologically, standard first-generation panel frameworks fail under the weight of regional integration; thus, this paper deploys an advanced second-generation estimation technique, specifically the Dynamic Common Correlated Effects (DCCE) Mean Group estimator operationalized via a Cross-Sectional Error Correction Model (CS-ECM) layout. The empirical findings extracted from the long-run estimation and the short-run estimation yield critical, structurally nuanced insights. In the long run, structural trend inflation (INFLR) is positively and significantly driven by cyclical demand pressures via the output gap (TOG}), a relationship that remains robustly highly significant in the short run (∆TOG), validating the persistent dominance of the New Keynesian Phillips Curve within the periphery. Conversely, for the sovereign debt load (SDL), the long run displays a positive coefficient with marginal statistical significance, whereas short-run fiscal innovations (∆SDL) show complete statistical insignificance due to policy implementation lags. For trade openness (lnTOP), the long run displays weak negative significance, while short-run trade expansions (∆lnTOP) yield a highly significant, massive positive structural pricing impact on inflation dynamics. Finally, the ECB’s centralized monetary policy rate (MPR) displays long-run neutrality due to the currency union’s structural rigidities; yet short-run innovations (∆MPR) exert an immediate, highly significant positive price innovation. In conclusion, the economic reality of the Eurozone periphery demonstrates that localized pricing structures are acutely sensitive to immediate monetary and trade shocks in the short run, yet are governed primarily by structural output gaps and creeping fiscal expansions in the long run. Based on these outcomes, the study recommends that the GIPS authorities transition from rigid fiscal metrics toward targeted structural capacity investments.
Keywords: DCCE mean group, Monetary Policy Rate., long-run structural relationships, output gap, short-run dynamics, sovereign debt loads, structural inflation
