Deciphering years of stubbornly low inflation, some economists argue that standard monetary policy is ineffective because globalisation, the rapid ageing of the population and technological advances have changed how people save and spend, resulting in lower inflation.
The ECB paper said such a conclusion was wrong, however, arguing that low inflation was instead caused by a series of shocks, exacerbated by ECB forecasting errors and uncertainty about unconventional monetary policy, rather than a new economic reality.
"A key finding of this paper is that the missing inflation was rather due to cyclical factors, both global and domestic," the researchers said, arguing that long-standing models on the inverse relationship between unemployment and inflation, called the Phillips curve, remain valid.
Facing the global financial crisis, Europe's own debt crisis and imploding commodity prices, the ECB has cut interest rates into negative territory and spent more than 1.5 trillion euros ($1.6 trillion) to buy debt, all in the hopes of reviving growth and prices.
It has missed its 2 percent inflation target for nearly four years and expects to miss at least through 2018 as underlying price growth remains weak and the bloc is still working through a massive debt pile.
The research paper noted that once rates hit their effective bottom, low inflation becomes more difficult to revive, reflecting the negative shocks and the long adjustment of businesses and households to the new realities of unconventional monetary policy, resulting in a slow transmission mechanism.
Still, the stabilisation of long term inflation expectations indicates that monetary policy remains effective in achieving its target, the paper concluded.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
