curve is a proxy for central bank credibility. however, its connection with the deep strategic foundations of a central bank is what is missing from the model and it is what the ecb has tried to make firm and clear with its monetary pillar when our strategy was first announced in 1998. the second function of money is that of a privileged monitoring device that can help explain facts and shocks even at a shorter horizon. these are shocks that originate in the market for funds and liquidity and can disturb from time to time the workings of the transmission of monetary policy. the mainstream model of inflation determination, organised around the new - keynesian phillips curve, is inhospitable to liquidity and risk considerations. but this is no reason for abandoning monetary analysis. it is a reason for refining the model and bringing it to a stage where it can provide help to central bankers in all the tasks – be it the anchoring of inflation expectations or the identification and deflection of monetary shocks – in which they daily engage. 5. concluding remarks after years of keynesians / monetarists controversies over the sources of inflation, a consensus has emerged and is now dominant in macroeconomic theory and practice : inflation is a monetary phenomenon. in the long term, monetary policy can only influence nominal variables. the consensus model centred around a reconstructed phillips curve – unlike its infamous predecessor – grants no free lunch to policymakers. so, there is more than a sense in which we all can say that the new phillips curve encapsulates fundamental tenets of prudent monetary policy - making : the inflation process is forward - looking and will inexorably and quickly incorporate and perpetuate any deviations from price stability, if and when central banks were to start experimenting with the economy. but inflation formation is a complex phenomenon in which expectations interact with current and past shocks – to the cost structure of firms as well as to the monetary and financial fabric of the economy – in ways that a phillips curve cannot fully account or describe. failure to adopt an all - encompassing view of the inflation process will lay down the potential for economic damage. the ultimate lesson that i draw from the vicissitudes of the phillips curve in the half of a century behind us is that we should all beware of models that short - circuit the workings of a complex market economy in a single equation. thank you. references benati, luca ( 2008a ), “ investigating inflation persistence across monetary regimes ”, quarterly journal of economics, august

growing industry of macroanalyses that was spawned by their article. samuelson - solow ’ s followers took the phillips curve as literally offering a “ menu ” of combinations of inflation and unemployment from which policymakers could choose at will – that is, an exploitable trade - off. in february 1963, three years after the publication of samuelson and solow ’ s paper, federal reserve chairman william mcchesney martin openly rejected the notion of an exploitable in fact, phillips ’ ( 1958 ) paper was based on annual data, whereas the two top panels of figure 1 are based on monthly data downloaded from the nber macro history database on the web ( see at : www. nber. org ). see samuelson and solow ( 1960 ). trade - off between inflation and unemployment in his statement before the joint economic committee of the u. s. congress. 3 disapprovingly, he pointed out that : “ [ … ] there was even serious discussion of the number of percentage points of inflation we might trade off for a percentage point increase in our growth rate. the underlying fallacy in this approach is that it assumes that we can concentrate on one major goal without considering collateral, and perhaps deleterious, side effects on other objectives. ” in december 1965, two years before milton friedman ’ s presidential address to the american economic association, which ( re - ) introduced the notion of the long - run vertical phillips curve into macroeconomics, 4 chairman martin discussed the role of inflation expectations in shifting the unemployment - inflation equilibrium along the very same lines friedman and edmund phelps 5 would then expound in analytical terms : 6 “ if labor had had reason to fear a persistent substantial rise in the cost of living, it would have felt compelled to seek compensatory increases in wages ; and if management had had reason to expect a general increase in the price level, it would not have felt compelled to resist such demands. in that case, wages would certainly have risen faster than productivity ; prices would have been raised in consequence ; and the feared inflationary spiral would have become actuality. ” 7 subsequent developments are well known. on the theoretical front, 1967 and 1968 saw the independent enunciation of the “ natural rate hypothesis ”, both in friedman ’ s presidential address to the american economic association – which i mentioned already – and in the work that ultimately won edmund phelps the nobel prize. underlying the natural rate hypothesis are two key concepts. • first, monetary neutrality :