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Rational inattention, inflation developments and perceptions after the euro cash changeover

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  • Ehrmann, Michael

Abstract

This paper uses the euro cash changeover to test theories of finite informationprocessing capacities on the side of consumers. It argues that the denomination of prices in a new currency has increased the information-processing requirements for consumers by more than for sellers, a wedge that can lead to price increases. The size of the wedge should depend on the complexity of the currency conversion rates. In line with this theory, the paper finds that the evolution of prices for food products around the cash changeover varied across countries, depending on the complexity of conversion rates. These changeover effects are found in particular for goods with prices below one euro sold in mid-priced stores. The paper also finds that cross-country differences in the mismatch of perceived and actual inflation in the aftermath of the cash changeover are linked to differences in the complexity of conversion rates. JEL Classification: D84, E31, E58, L11

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0588.

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Date of creation: Feb 2006
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Handle: RePEc:ecb:ecbwps:20060588

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Keywords: euro cash changeover; perceived inflation; rational inattention;

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References

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Citations

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Cited by:
  1. Thomas A. Eife, 2006. "Price setting behaviour and price setting regulations at the euro changeover," Bank of Estonia Working Papers 2006-06, Bank of Estonia, revised 12 Oct 2006.
  2. Sarah M. Lein & Thomas Maag, 2011. "The Formation Of Inflation Perceptions: Some Empirical Facts For European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(2), pages 155-188, 05.
  3. Lena Dräger & Jan-Oliver Menz & Ulrich Fritsche, . "Perceived Inflation under Loss Aversion," Macroeconomics and Finance Series 201105, Hamburg University, Department Wirtschaft und Politik.
  4. Parsley, David & Wei, Shang-jin, 2007. "In Search of a Euro Effect: Big Lessons from a Big Mac Meal?," MPRA Paper 6041, University Library of Munich, Germany.
  5. Amelie Gamble, 2007. "The “Euro Illusion”: Illusion or Fact?," Journal of Consumer Policy, Springer, vol. 30(4), pages 323-336, December.
  6. Isabell Koske, 2011. "Price effects of the euro cash changeover: the role of product market competition," Empirica, Springer, vol. 38(2), pages 223-230, May.
  7. Thomas Maag, 2009. "On the Accuracy of the Probability Method for Quantifying Beliefs about Inflation," KOF Working papers 09-230, KOF Swiss Economic Institute, ETH Zurich.
  8. Stix, Helmut, 2009. "Perceived inflation and the euro: Evidence from an Austrian survey," European Journal of Political Economy, Elsevier, vol. 25(4), pages 547-561, December.
  9. Mestre, Ricardo, 2007. "Are survey-based inflation expections in the euro area informative?," Working Paper Series 0721, European Central Bank.
  10. Michael J. Lamla & Sarah M. Lein, 2010. "The Euro Cash Changeover, Inflation Perceptions and the Media," KOF Working papers 10-254, KOF Swiss Economic Institute, ETH Zurich.
  11. Paolo Del Giovane & Roberto Sabbatini, 2006. "Perceived and Measured Inflation after the Launch of the Euro: Explaining the Gap in Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 155-192, November.
  12. Golden, Brian & Monks, Allen, 2009. "Measuring Inflation Expectations in the Euro Area," Quarterly Bulletin Articles, Central Bank of Ireland, pages 67-84, January.
  13. Theodore Pelagidis & Taun Toay, 2007. "Expensive Living: The Greek Experience under the Euro," Intereconomics: Review of European Economic Policy, Springer, vol. 42(3), pages 167-176, May.
  14. Thomas A. Eife & W. Timothy Coombs, 2007. "Coping with People's Inflation Perceptions during a Currency Changeover," Working Papers 0458, University of Heidelberg, Department of Economics, revised Nov 2007.
  15. 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).
  16. Felix Hüfner & Isabell Koske, 2008. "The Euro Changeover in the Slovak Republic: Implications for Inflation and Interest Rates," OECD Economics Department Working Papers 632, OECD Publishing.

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