This is certainly the case for the euro area where the low inflation can largely be explained by domestic demand weakness, possibly leading to a larger degree of economic slack than indicated by the usual methods. The link between inflation and real economic activity appears however to have strengthened in the euro area as of late (steepening of the Phillips curve).
We should thus be able to bring the inflation rate closer to target in the medium term, provided that our policies are successful in significantly reducing the economic slack. Outline 1. Introduction  2. Prolonged low inflation: puzzles and forecasting errors  3. Drivers of low inflation in the euro area: domestic or external? 4.