Missing inflation in the euro area
The core inflation in the euro area grows well below 2% for an extended period of time. A 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 thus built a simple two-country model to investigate whether the asymmetric shocks to the periphery countries may generate different inflation, output and policy responses when compared to the symmetric shocks. The results show that an asymmetric demand shock to the periphery countries has a larger effect on the output gap and the inflation rate in the euro area over a symmetric demand shock and thus implies a stronger policy reaction.