engulfed the euro area over the last two years, such as the tensions in global financial markets in august 2015 and the slowdown of global demand since the first half of 2015. more recently, the firming recovery has also broadened across countries and sectors. as regards inflation dynamics, our determined policy actions have been material in warding off deflation. they have also contributed to a re - anchoring of long - term inflation expectations. market - based measures of inflation expectations, however, have not yet returned to their precrisis levels. underlying inflation dynamics remain subdued, and risks and uncertainties still prevail, especially those related to the geopolitical environment. to sum up, the ongoing economic recovery is still predicated to a large extent on very favourable financing conditions that, in turn, depend on continued monetary policy support. the firming recovery is not yet sufficiently robust to ensure a self - sustained convergence of inflation rates to levels closer to 2 %. overall, our monetary policy measures are effective, and are gradually bringing inflation back to a path that is consistent with price stability over the medium term. this takes time, and it requires determination and patience. 1 i would like to thank soren radde and federic holm - hadulla for their contributions to this speech. 2 see ciccarelli, m. and osbat, c. ( eds. ), “ low inflation in the euro area : causes and consequences ”, occasional paper series, no 181, european central bank, frankfurt am main, january 2017, and the references cited therein. 3 at the level of individual euro area countries, a large proportion of specifications also displays a significant phillips curve slope, albeit with the exception of some euro area countries, probably on account of confounding factors related to global exposures and persistent structural changes. however, the finding that domestic cyclical conditions were an important driver of the disinflationary period from 2012 to 2014 is common to all countries. 4 theoretically, the impact of population ageing on inflation may go both ways, but the bulk of the literature points to a negative effect. see e. g. bullard, j., garriga, c., and waller, c. j., “ demographics, redistribution, and optimal inflation ”, federal reserve bank of st. louis review, vol. 94, no 6, 2012 ; shirakawa, m., “ demographic changes and macroeconomic performance : japanese experiences ”,

a genuine change in the causal relationship between economic slack and inflation, or from a prevalence of disinflationary pressures originating from other sources, including potential shocks and a downward shift of inflation expectations, which could have more than offset the typical impact of slack on inflation. the relationship between inflation and economic slack with regard to the first dimension, the bulk of the evidence confirms that domestic cyclical conditions have played an important role in explaining disinflationary pressures. domestic factors have been found to be the main driver of disinflation between 2012 and 2014, and have continued to weigh on inflation thereafter. measures of economic slack, in particular, have proven informative in forecasting inflation outcomes. moreover, eurosystem staff calculations, using various combinations of economic activity indicators and inflation expectation measures, have found that more than 80 % of the standard estimated phillips - curve specifications confirm a significant relationship also during the more recent period of disinflation. these observations confirm that the relationship between economic activity and inflation, as postulated by the phillips curve, has continued to play a role at the euro area level. 3 the link between inflation and economic slack is complicated by several factors. on the one hand, the degree to which prices respond to slack may depend on the state of the business cycle and could change, in particular, in severe and protracted recessions. the empirical evidence on such non - linearities, however, is not conclusive. on the other hand, secular shifts in the economy may have altered the relationship between inflation and economic slack. for instance, the trend towards a deeper integration of the global economy over the last decades is likely to have increased the importance of global relative to local conditions in shaping domestic cost and price pressures. a further often - cited factor is demographics – and especially the trend towards greater longevity – which may have interacted with cyclical conditions by inducing households to save more and, ultimately, put downward pressure on inflation. 4 empirical evidence on this issue is inconclusive and demographics would 2 / 5 bis central bankers'speeches only have lasting effects on the economy if left unattended by monetary policy. overall, these observations have three important implications for monetary policy. first, the evidence confirms that the core phillips curve connection linking inflation formation to resource utilisation remains a key ingredient in explaining the prevailing disinflationary pressures. second, this finding implies that monetary policy, which typically affects the level of slack by steering financing and credit conditions in the economy