Lena Vogel () (Department for Economics and Politics, University of Hamburg) Jan-Oliver Menz () (Department for Economics and Politics, University of Hamburg) Ulrich Fritsche () (Department for Economics and Politics, University of Hamburg)
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Building on the hypotheses of loss aversion with respect to price increases and availability of frequently bought goods, Brachinger (2006,2008) constructs an alternative index of perceived inflation (IPI), which can reproduce the jump in the measure for perceived inflation after the Euro introduction in Germany that was not observable in standard HICP inflation. We test the hypotheses of Prospect Theory with regard to households’ inflation perceptions underlying Brachinger’s IPI in a panel estimation for 12 European countries. There is evidence that perceptions react more strongly to ‘losses’ in inflation than to ‘gains’ before the Euro cash changeover, but not afterwards. Moreover, we find empirical support for the availability hypothesis, stating that frequently bought goods have a stronger influence on inflation perceptions than the overall price index.
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Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number
200903.
Find related papers by JEL classification: D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
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