case. ex - post, if we exploit all available information, we do have a consistent understanding of inflation developments after the financial crisis. and we can fruitfully build on this understanding when designing appropriate policy responses to the prevailing low inflation environment. prolonged low inflation : some puzzles clearly, for headline inflation commodity, price shocks have played a significant role. but the two highlighted puzzles also apply to core inflation. importantly, the trend for a weaker relationship with economic slack also applies to core inflation. core inflation reflects mostly bis central bankers ’ speeches domestic factors, as indirect effects from external developments are muted and take time to operate. that is why i consider it more useful to focus on core inflation dynamics for the purpose of discussing their consequences for monetary policy. there is a vast literature on the first puzzle of the “ missing disinflation ”, which offers a variety of explanations, mostly with a reference to the us. two important aspects in particular are investigated by papers here at this conference. the paper by gilchrist, schoenle, sim, and zakrajsek ( 2015 ) emphasizes the role of higher mark - ups of liquidity - constrained firms. in particular it shows that facing financial distress in the absence of devaluation, firms in financially weak countries have an incentive to raise their prices to cope with liquidity shortfalls. another way of solving the “ missing disinflation ” puzzle is suggested in a paper by coibion and gorodnichenko ( 2015 ). namely, these authors propose using household expectations from surveys to measure inflation expectations, explaining the rise in household inflation expectations in 2009 to 2011 by the increase in oil prices. coibion, gorodnichenko and kumar ( 2015 ), will in turn, present at this conference relevant work on firm expectations. they find that firms ’ average inflation expectations are systematically higher than those of professional forecasters and resemble those of households. they conclude that firms devote few resources to collecting and processing information about inflation. the paper by wiederholt ( 2015 ) studies a new keynesian model of sluggish and heterogeneous inflation expectations. it finds that the deflationary spiral in bad states of the world is less severe than in the models currently used for policy analysis. many of these approaches, besides solving the puzzle a posteriori, also provide new methods that promise to improve future inflation forecasting. the use of short - term unemployment 1 or household inflation expectations that are closer to those of economic agents are

the economy is at the zlb, a negative channel also appears : since nominal interest rates cannot be reduced, any fall in inflation translates into an increase of the real interest rate, generating contractionary effects. in particular, prices will fall if the initial surge in aggregate demand generated by the reforms is smaller than the expansion in aggregate supply. eggertsson, ferrero and raffo ( 2014 ) show that, in the absence of physical capital accumulation, the fall in inflation and the lack of leeway to make further interest rate cuts render this type of reform contractionary in the short run, through an increase in the real interest rate. when the former demand effect prevails on the increase in aggregate supply, the reforms have expansionary short - term effects. in particular, gerali, notarpietro and pisani ( 2015 ) show that reforms simultaneously implemented in the whole euro area can favour an earlier exit from the zlb if they generate sufficiently large short - run inflationary effects through an increase in physical capital accumulation. the conference paper by arce, hurtado and thomas ( 2015 ) develops a two - region model of the euro area with deleveraging, showing that a reform in a peripheral region which increases future output has always short - term expansionary effects on the domestic economy. however, depending on the presence of the zlb, the reform may generate positive or negative spillovers on the core region. conclusions let me conclude. inflation dynamics since the great recession have shown signs of instability that have led to a sequence of systematic forecasting errors. the two puzzles of bis central bankers ’ speeches “ missing disinflation ” and “ excessive disinflation ” triggered a surge of new research around the phillips curve and its possible demise, which seems to have been prematurely foretold. the phillips curve seems to survive the recent reassessment and is still a valid tool of analysis in the euro area, meaning that a sustained recovery in inflation is conditional upon the increase in real activity and inflation expectations. even if policy interest rates reach their effective lower bound, monetary policy does not run out of ammunition. in particular central banks can use forward guidance and unconventional monetary policy measures in the form of “ quantitative easing ” in order to stimulate economic activity and bring inflation closer to the target. such policies, however, cannot be a replacement for proper structural reform to the extent that it is needed. the euro area and other advanced economies continue to face a complex challenge to overcome the legacy