Costly Inflation Misperceptions
AbstractOne 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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Bibliographic InfoPaper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0455.
Length: 18 pages
Date of creation: Oct 2007
Date of revision: Oct 2007
euro changeover; perceived inflation;
Find related papers by JEL classification:
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-01 (All new papers)
- NEP-MAC-2007-12-01 (Macroeconomics)
- NEP-MON-2007-12-01 (Monetary Economics)
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- Thomas A. Eife & W. Timothy Coombs, 2007.
"Coping with People's Inflation Perceptions during a Currency Changeover,"
0458, University of Heidelberg, Department of Economics, revised Nov 2007.
- Thomas A. Eife & W. Timothy Coombs, 2006. "Coping with People’s Inflation Perceptions During a Currency Changeover," Working Papers 0435, University of Heidelberg, Department of Economics, revised Dec 2006.
- Lunn, Pete & Duffy, David, 2010. "The Euro Through the Looking-Glass: Perceived Inflation Following the 2002 Currency Changeover," Papers WP338, Economic and Social Research Institute (ESRI).
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