A recent study analysing the experience of the Spanish labour market confirms this view: over time job finding rates become less and less responsive to improvements in the aggregate labour market.14 I would even go one step further, namely to question whether allowing inflation to overshoot would help address the more subtle forms of hysteresis in the economy linked to uncertainty and 7/9  BIS central bankers' speeches  investment. I have no doubt that investment would have been much lower today were it not for the impulse generated by our policies. But central banks cannot address all of the underlying causes of weak capital formation. For example, if it is true that investment is being affected to some extent by weak long-term growth expectations, then monetary policy cannot be the whole answer – unless one believes in a very hard form of “reverse hysteresis”. The truth is that should weak long-term growth expectations indeed become self-fulfilling, then we would also see signs of hysteresis in the natural rate of interest, which economists frequently call "r-star". A lower r-star, in turn, would push the interest rate level at which policy becomes expansionary even lower – feeding concerns about the ability of monetary policy to address advanced cases of hysteresis. We don't want the central bank itself to fall into the “anxiety trap”. The answer therefore has to address the structural causes of low trend growth and long-term unemployment through policies supporting productivity and minimising both dualities in the labour market and social exclusion.
This is confirmed by Phillips curve estimates. As you can see from the right-hand side chart on slide 3, ECB in-house estimates using a variety of slack and inflation expectations measures suggest that core inflation today is well below what historical regularities would suggest. Of course, a number of factors – such as changes in the slope, weak productivity growth or second-round effects of past low inflation – might be at work here. But in the current context this is unlikely to be the whole story. For one, there is considerable uncertainty around the slope of the Phillips curve. As we heard this morning, some estimates show that the curve has flattened in recent years. ECB research, by contrast, found evidence that inflation has become more responsive to slack lately, but with notable heterogeneity across euro area Member States.7 Blanchard, Cerutti and Summers have not found much change at all during the crisis.8 Second, our Phillips curve estimates show that even once we control for past low inflation and weak productivity growth, there is still a considerable part that cannot be explained by the model. These analyses therefore do offer one useful conclusion: that slack may be larger and that structural unemployment may perhaps not have risen by as much as some estimates suggest. This also means that policymakers should be careful in attaching too much weight to notoriously unreliable and hard-to-estimate measures such as the NAIRU.