peter praet : price stability – a sinking will - o ’ - the - wisp? intervention by mr peter praet, member of the executive board of the european central bank, during a panel on “ the elusive pursuit of inflation ” at the imf spring meetings seminar, washington dc, 16 april 2015. * * * i would like to thank john hutchinson and elena bobeica for their contributions to this speech. ladies and gentlemen, i would like to thank the imf for inviting me to this excellent workshop and to be part of such a distinguished panel. i. introduction almost 50 years ago milton friedman famously described the phillips curve as a “ will - o - thewisp ”. when he first used this metaphor, he was isolated in the macroeconomist community. but in a matter of few years – and after a few bad inflation surprises that were hard to square with the solid and steady phillips curve formalism that was embedded in many models of the time – his vision became less alien. many of his colleagues started to admit that the phillips curve was an extraordinarily frail platform for central banks to base monetary reflation experiments on. indeed, at that point, friedman had been joined by the so - called neo - classicals to demonstrate that what might appear as a steady association between price pressures and economic slack could in fact represent a collection of disequilibrium points which could only be maintained by monetary policy perpetuating the disequilibrium through ever - more aggressive expansion. arthur okun, one of the founding fathers of post - war stabilisation theories, was more cutting in his assessment. on observing a scatterplot of phillips curve observations over the stagflation decade of 1970 – 1980 – which defied theory as it showed a positive ( not a negative ) correlation between inflation and unemployment – he remarked that the curve resembled “ an unidentified flying object. ” i think it is safe to say that few economists at that time, at either end of the macro - theory spectrum, could have imagined that a destabilisation of the phillips curve could occur, symmetrically, in both directions – that is, on a sustained decelerating as well as accelerating path. that today a no less influential observer and global policy actor than the imf itself entertains this possibility makes it sufficiently important for us central bankers to consider. therefore, i am grateful for this opportunity to clarify my own thinking on this topic, particularly in

because governments are not doing enough to raise confidence in the future. if firms are simultaneously revising down their growth expectations as we expand our monetary policy, we will not see the impact we expect and which is required. yet the opposite story is also possible. if governments are determined in addressing their structural challenges, all the conditions are there for growth to surprise on the upside. we are already seeing, in countries like spain, how improved financing conditions together with targeted structural reforms can lead to stronger - than - expected growth outcomes. and if we take advantage of the window of opportunity that exists today, that possibility is there for the whole euro area. conclusion let me conclude. the success of the euro area depends on every party doing its job, including the central bank. for us that means being fully symmetric in how we interpret our mandate : acting as decisively when the inflation outlook undershoots our aim as we would when it exceeds it. this is our responsibility in the treaty and our duty to the firms and households of the euro area. remember that firms and households have entered contracts and entertain economic relationships based on the expectation that we will meet our inflation objective. if we fail, then we make their recovery from the crisis harder. and that loss of credibility would in turn make it harder for us to deliver our mandate in the future. bis central bankers ’ speeches that is why, faced with an increasing risk of a too prolonged period of low inflation, we increased our stimulus to a degree necessary to bring inflation closer to 2 %. and we will continue to monitor the progress towards a sustained adjustment in the path of inflation. bis central bankers ’ speeches