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Prospect Theory and Inflation Perceptions - An Empirical Assessment

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  • 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)

Abstract

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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File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_3_2009.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 200903.

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Length: 79 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:hep:macppr:200903

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Web page: http://www.wiso.uni-hamburg.de/dwp
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Keywords: Inflation Perceptions; Prospect Theory; Dynamic Panel;

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References

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Citations

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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 WP338, Economic and Social Research Institute (ESRI).
  2. 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.
  3. Lena Dräger, 2011. "Inflation Perceptions and Expectations in Sweden - Are Media Reports the `Missing Link'?," Macroeconomics and Finance Series 201101, Hamburg University, Department Wirtschaft und Politik.

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