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Missing inflation in the euro area (June 2019)

The core inflation in the euro area grows well below 2% for an extended period of time. Cross-country analysis suggests that after the euro area debt crisis the core inflation in the periphery countries contributes to the overall inflation in the euro area significantly less than before. We built a simple two-country model to investigate whether asymmetric shocks to the periphery and core countries may generate different inflation, output and policy responses compared to symmetric shocks. Results show that an asymmetric demand shock to the periphery has larger effect on the euro area inflation rate and output gap over a symmetric shock, thus suggesting stronger policy reaction.