Calvo, G. (1998), “Capital flows and capital-market crises: The simple economics of sudden stops”, Journal of Applied Economics, 1, pp.35–54. De Larosiere, J. (2014), “The international monetary ‘anti-system”, Central Banking Journal, May. Dell’Erba, S. and Reinhardt, D. (2013), “Not all capital waves are alike: A sector-level examination of surges in FDI inflows ”, Bank of England Working Paper No. 474. Farhi, E., Gourinchas, P.-O., and Rey, H. (2011), ‘Reforming the international monetary system’, CEPR Report. Feldstein, M. and Hoioka, F. (1980), “Domestic Savings and International Capital Flows”, The Economic Journal, Vol. 90, No. 358, pp. 314–329. Forbes, K., Fratzscher, M. and Straub, R. (2013), “Capital controls and macroprudential measures: what are they good for?”, MIT Sloan Research Paper No. 5061-13, December. Forbes, K. and Warnock, F. E. (2012), “Capital flow waves: Surges, stops, flight, and retrenchment”, Journal of International Economics 88, pp. 235–251. Fratzscher, M. (2012), “Capital flows, push versus pull factors and the global financial crisis”, Journal of International Economics 88, pp. 341–356. Fratzscher, M., Lo Duca, M. and Straub, R. (2013), “On the international spillovers of US quantitative easing”, Deutsches Institut für Wirtschaftsforschung Discussion Paper 1304. Gai, P. and Kapadia, S. (2010), “Contagion in financial networks”, Proceedings of the Royal Society A, Vol. 466, No. 2120, pp. 2401–2423. Goldin, I. and Mariathasan, M. (2014), “The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do about It”, Princeton University Press, July.

In the context of this more protracted weakness of the euro area economy, both realised and projected inflation have been persistently below levels that are in line with the ECB Governing Council’s medium-term aim. Headline inflation remains well below 2%, while inflation excluding the more volatile food and energy components has been hovering around 1% for an extended period of time. Underlying inflation remains muted, as the weaker economic outlook may imply a delay in the pass-through of wages to prices. In particular, firms are absorbing increases in labour costs in their profit margins rather than passing them on to customers. Meanwhile, indicators of inflation expectations stand at low levels. Although the likelihood of deflation remains limited, market expectations of inflation over the medium term are settling around values that are not consistent with our inflation aim. Since my last hearing here, we have revised down the inflation outlook over the entire projection horizon, first in the March 2019 staff projections and then again in September, reflecting weaker economic activity and lower energy prices. Inflation is currently expected to average 1.2% in 2019, 1.0% in 2020 and 1.5% in 2021, which is well below the Governing Council’s medium-term aim of below, but close to, 2%. The ECB’s response to the current outlook So when the Governing Council met two weeks ago, it was confronted with a more rapid and extended slowdown than previously anticipated, persistent and prominent downside risks to the growth outlook, and a further delay in the convergence of inflation towards our aim.