As deflation has continued for nearly 15 years, the Phillips curve itself has shifted downward. And its slope has become moderate, due partly to a decline in firms’ pricing power amid globalization. Given such shape of the current Phillips curve, the 2 percent price stability target cannot be achieved only by achieving a 2 percent positive output gap.
Because of their ability to lend and so to create liquidity for banks. In normal times, this may just mean day-to-day management of liquidity in the financial system. But in times of financial stress, as we’ve seen in recent years, it may mean having to act as lender of last resort.