area as a whole from 2012, or for the larger member countries. this is particularly surprising because forecasters did take into account the fall in economic activity in most euro area countries after 2011, which generated significant gaps between actual and potential output. the ecb has not been alone in over - predicting euro area inflation. the imf, ecb survey of professional forecasters ( spf ), consensus economics, euro zone barometer, oecd and european commission have also systematically overpredicted both headline and core inflation at all horizons, especially since the second quarter of 2012. bis central bankers ’ speeches figure 3 however, as policy makers we need more than just good inflation forecasts : we also need to understand the inflation process in order to better assess the role of monetary policy. we also need to be able to explain our reasoning to the public, as the management of expectations has become such an important monetary policy instrument. this is one more reason for continuing to use the phillips curve as a tool to discuss inflation dynamics. the current attention to the relationship between inflation and economic slack has led to an intense debate on the stability of the phillips curve and its power to explain the twin puzzle. empirical research, especially in the united states, shows that the slope of the phillips curve has varied over time, with a clear tendency to flatten over the years. for the euro area, the evidence from several recent papers points to a steepening in recent years ( see e. g. oinonen and paloviita ( 2014 ), riggi and venditti ( 2015 ) and foroni and porqueddu ( 2015 ) ). this development is especially marked in those countries which experienced deeper and longer recessions and made greater efforts to reform their product and labour markets, with an impact on nominal rigidities ( see, for italy, riggi and santoro ( 2015 ) and, to a lesser extent, for spain, banco de espana ( 2013 and 2015 ). when analysing the excessive disinflation in the euro area since 2012, natural questions arise as to whether we are facing a new regime of low inflation ( e. g. due to demographics, integration of low - cost countries in global trade, less powerful trade unions, dominance of a service economy ), and whether the phillips curve ( and “ which ” phillips curve ) is still an appropriate framework of analysis. a number of technical issues pertaining to the phillips curve have not yet been settled in the literature.

economic slack. outline 1. introduction 2. prolonged low inflation : puzzles and forecasting errors 3. drivers of low inflation in the euro area : domestic or external? 4. the phillips curve as a vehicle to discuss inflation dynamics : 5. measuring the economic slack, the slope and its stability ; 6. are hybrid new keynesian phillips curves useful in understanding inflation dynamics? bis central bankers ’ speeches 7. stability of the coefficients of inflation inertia, economic activity, inflation expectations and external prices. limitations of the phillips curve and the need to use several different models. 8. lessons for monetary policy : the use of models and judgement to understand, forecast and design policies to influence medium - term inflation. achieving the inflation target in the euro area. introduction it is a great pleasure to participate in this policy panel with such distinguished fellow participants. in my remarks today i will discuss the general difficulties in dealing with inflation dynamics, but i will concentrate on the recent developments in euro area inflation and discuss their implications for monetary policy. understanding inflation dynamics has become particularly important in view of the low inflation regime now prevailing and because the traditional relationship between slack in the economy and inflation seems to have weakened significantly in some countries. figure 1 if confirmed, the flattening of the phillips curve would be relevant for monetary policy because that relationship was the traditional linchpin of the transmission mechanism that gave central banks control of inflation. the subsequent focus on the role of expectations and their management in the toolkit of monetary policy reduced but did not eliminate the relevance of that traditional mechanism. in 2006 both the international monetary fund ( imf ) and the federal reserve started to highlight a decade - long decline in the slope of the phillips curve, i. e. the coefficient of economic slack ( imf ( 2006 ), iakova ( 2007 ) and roberts ( 2006 ) ). this decline has been challenged by gordon ( 2007 and 2013 ) as being too dependent on the phillips curve specification, being particularly associated with variants of the new keynesian phillips curve ( nkpc ), but not verified by gordon ’ s own “ triangle model ”. coibion and gorodnichenko ( 2015 ) show that evidence of slope decline is bis central bankers ’ speeches mixed for the united states. stock and watson ( 2010 ) say that “ there are some hints that the slope parameter might be smaller at low levels of inflation but these hints are not robustly confirmed by statistical tests ”. stella and stock ( 2012 ) even find signs of a