flat, it has not changed in any statistically significant manner in recent years ( see left chart slide 4 ). instead, phillips curve models point to other factors putting persistent downward pressure on underlying inflation in recent years ( see right chart slide 4 ). research suggests that these factors include slow - moving secular forces, such as demographic change, the decline in productivity growth, the impact of globalisation and digitalisation on prices, profits and the bargaining power of workers, as well as far - reaching changes in energy production and consumption, also due to climate change. the coincidence of low inflation with a persistent decline in real interest rates corroborates the view that structural factors are likely to have played an important role in recent years ( see left chart slide 5 ). with more savings chasing fewer investments, low and stable inflation today is consistent with real short and long - term interest rates that are much lower than even a decade ago. available estimates of this “ equilibrium ” rate of interest suggest that nowadays stable inflation is likely to require a negative real shortterm interest rate ( see right chart slide 5 ). the implications of these developments for monetary policy are twofold. first, since monetary policy is acting on the demand side, it has less traction in countering persistent structural shocks to inflation. in the absence of supply - side policies, inflation can then diverge from central banks ’ aim for a protracted period of time. adaptive expectations raise the costs of such divergences. if firms and households expect inflation to remain at very low levels, it becomes even harder for central banks to achieve their inflation aim ( see left chart slide 6 ). second, the decline in real interest rates limits the extent to which monetary policy can stabilise the economy in the wake of demand - side shocks. the pandemic is a case in point. despite the unprecedented severity of the crisis and the large shortfall in aggregate demand, the ecb did not cut its key policy rates. although there is some room left to reduce short - term rates further, the benefits and costs of deeper negative rates need to be weighed carefully. to circumvent the effective lower bound, central banks have resorted to unconventional monetary policies. for example, in response to the pandemic, the ecb launched a new asset purchase programme – the pandemic emergency purchase programme ( pepp ) – and a new series of targeted longer - term refinancing operations ( tltro iii ). such tools are

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