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The Formation Of Inflation Perceptions: Some Empirical Facts For European Countries

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  • Sarah M. Lein
  • Thomas Maag

Abstract

This paper presents some empirical facts on the dynamics of perceived inflation rates for EU countries. First, we find that perceptions are inefficient and highly heteroge- neous, yet contemporaneously related to the actual rate of inflation. Second, similar to studies on inflation expectations, we estimate how often European consumers up- date their inflation perceptions employing Carroll's (2003) epidemiological model. The advantage of employing perceived instead of expected inflation is that the value of the newest information can exactly be measured: the actual rate of inflation. Our findings indicate that the stickiness of perceptions is generally higher than the stick- iness of expectations. Unlike studies using expectations, however, we cannot confirm that a constant fraction of the population updates information every month. Also observed heterogeneity of perceptions is much higher than implied by the epidemio- logical model.

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Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 58 (2011)
Issue (Month): 2 (05)
Pages: 155-188

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Handle: RePEc:bla:scotjp:v:58:y:2011:i:2:p:155-188

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Cited by:
  1. Péter Gábriel, 2010. "Household inflation expectations and inflation dynamics," MNB Working Papers, Magyar Nemzeti Bank (the central bank of Hungary) 2010/12, Magyar Nemzeti Bank (the central bank of Hungary).
  2. Lena Vogel & Jan-Oliver Menz & Ulrich Fritsche, 2009. "Prospect Theory and Inflation Perceptions - An Empirical Assessment," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 200903, Hamburg University, Department Wirtschaft und Politik.
  3. Thomas Maag, 2009. "On the Accuracy of the Probability Method for Quantifying Beliefs about Inflation," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 09-230, KOF Swiss Economic Institute, ETH Zurich.
  4. Michael J. Lamla & Sarah M. Lein, 2010. "The Euro Cash Changeover, Inflation Perceptions and the Media," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 10-254, KOF Swiss Economic Institute, ETH Zurich.
  5. Lena Dräger & Jan-Oliver Menz & Ulrich Fritsche, . "Perceived Inflation under Loss Aversion," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 201105, Hamburg University, Department Wirtschaft und Politik.
  6. Lena Dräger, 2011. "Inflation Perceptions and Expectations in Sweden - Are Media Reports the `Missing Link'?," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 201101, Hamburg University, Department Wirtschaft und Politik.

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