Low inflation rates in the Euro Area raise the question of whether inflation is still credibly anchored to the Euro-system's medium term target of below, but close to 2%. The purpose of this paper is twofold. On the one hand, we investigate why agents' inflation expectations that inflation will...

When inflation is below its target conventional central banking practice is to decrease the nominal interest rate. The reasoning behind this practice is that reducing interest rates increases spending, heats up the economy and increases inflation. However, this conventional wisdom has recently...

When inflation picks up, central banks are most concerned that the de-anchoring of inflation expectations and the ignition of wage-price spirals will trigger inflation dynamic instability. However, such scenarios do not materialize in the standard New Keynesian theoretical framework for monetary...