Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at Hoover Monetary Policy Conference “Finishing the Job and New Challenges”, Stanford University

Stanford, 10 May 2025

Standard theory of monetary policy rests on a simple premise: a stable relationship between inflation and the output gap. This is the logic behind the Phillips curve, which, in its most common form, relates inflation to a measure of economic slack, expected inflation and supply shocks.^[1]

The relationship between output and inflation was already under scrutiny well before the pandemic.

After the global financial crisis of 2008, inflation didn’t fall nearly as much as had been implied by conventional Phillips curve estimates. And once economies around the world recovered and unemployment fell, the bounce-back in inflation fell short of model predictions.

This is why that episode is known as the period of “missing deflation” and “missing inflation”.^[2]

The situation changed fundamentally…