Is there a Threat of Self-Reinforcing Deflation in the Euro Area? A View through the Lens of the Phillips Curve

The recent decline in euro area inflation has triggered new calls for additional monetary stimulus in order to counter the threat of a self-reinforcing deflation and recession spiral. In their new Kiel Policy Brief 79 the authors Volker Wieland (Goethe University of Frankfurt) and Maik Wolters (Kiel Institute) review the available evidence on inflation expectations, output gaps and other factors through the lens of the Phillips curve and compare with the Japanese deflation in the late 1990s. They conclude that the risk of a self-reinforcing deflation remains very small. Thus, the ECB best awaits the impact of the long-term refinancing operations once implemented for the first time in September before putting additional measures on line.