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Costly Inflation Misperceptions

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  • Thomas A. Eife

    ()
    (University of Heidelberg, Department of Economics)

  • Stephan Meier

    ()
    (UniCredit Group)

Abstract

One of the consequences of the euro changeover in 2002 was that for a period of several years people considerably overestimated actual inflation. The goal of this paper is to study whether misperceptions of this kind may have real effects, that is, whether they induce people to alter their behaviour. We also discuss the question how far the euro changeover and the ensuing discussion about price stability contributed to the recession that followed the changeover. Looking at the German restaurant sector, we find that people’s misperceptions can have significant negative effects. The contraction this sector experienced in the months after the changeover was too pronounced to be explained by normal business cycle movements. We provide a discussion about the causes of these misperceptions and how to avoid them in future changeovers.

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File URL: http://www.uni-heidelberg.de/md/awi/forschung/dp455.pdf
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Bibliographic Info

Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0455.

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Length: 18 pages
Date of creation: Oct 2007
Date of revision: Oct 2007
Handle: RePEc:awi:wpaper:0455

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Keywords: euro changeover; perceived inflation;

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References

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  1. Vincenzo Cestari & Paolo Del Giovane & Clelia Rossi-Arnaud, 2007. "Memory for prices and the euro cash changeover: An analysis for cinema prices in Italy," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 619, Bank of Italy, Economic Research and International Relations Area.
  2. Thomas A. Eife & W. Timothy Coombs, 2006. "Coping with People’s Inflation Perceptions During a Currency Changeover," Working Papers, University of Heidelberg, Department of Economics 0435, University of Heidelberg, Department of Economics, revised Dec 2006.
  3. Manfred Fluch & Helmut Stix, 2005. "Perceived Inflation in Austria – Extent, Explanations, Effects," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 22–47.
  4. Wunder, Christoph & Schwarze, Johannes & Krug, Gerhard & Herzog, Bodo, 2006. "Welfare Effects of the Euro Cash Changeover," IZA Discussion Papers 2508, Institute for the Study of Labor (IZA).
  5. Bettina Isengard & Thorsten Schneider, 2006. "The euro and its perception in the German population," Discussion Papers, University of Flensburg, International Institute of Management 011, University of Flensburg, International Institute of Management.
  6. Thomas A. Eife, 2006. "Price setting behaviour and price setting regulations at the euro changeover," Bank of Estonia Working Papers, Bank of Estonia 2006-06, Bank of Estonia, revised 12 Oct 2006.
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Cited by:
  1. Lunn, Pete & Duffy, David, 2010. "The Euro Through the Looking-Glass: Perceived Inflation Following the 2002 Currency Changeover," Papers, Economic and Social Research Institute (ESRI) WP338, Economic and Social Research Institute (ESRI).
  2. Thomas A. Eife & W. Timothy Coombs, 2006. "Coping with People’s Inflation Perceptions During a Currency Changeover," Working Papers, University of Heidelberg, Department of Economics 0435, University of Heidelberg, Department of Economics, revised Dec 2006.

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