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The Formation of Inflation Perceptions – Some Empirical Facts for European Countries

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Abstract

This paper presents some empirical facts on the dynamics of perceived inflation rates for EU countries. First, we find that perceptions are inefficient and highly heteroge- neous, yet contemporaneously related to the actual rate of inflation. Second, similar to studies on inflation expectations, we estimate how often European consumers up- date their inflation perceptions employing Carroll's (2003) epidemiological model. The advantage of employing perceived instead of expected inflation is that the value of the newest information can exactly be measured: the actual rate of inflation. Our findings indicate that the stickiness of perceptions is generally higher than the stick- iness of expectations. Unlike studies using expectations, however, we cannot confirm that a constant fraction of the population updates information every month. Also observed heterogeneity of perceptions is much higher than implied by the epidemio- logical model.

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Bibliographic Info

Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 08-204.

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Length: 54 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:kof:wpskof:08-204

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Keywords: perceived inflation; sticky information; inattention; expectation formation;

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Citations

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Cited by:
  1. Lena Dräger & Jan-Oliver Menz & Ulrich Fritsche, 2014. "Perceived inflation under loss aversion," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 282-293, January.
  2. Péter Gábriel, 2010. "Household inflation expectations and inflation dynamics," MNB Working Papers 2010/12, Magyar Nemzeti Bank (the central bank of Hungary).
  3. 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.
  4. Lena Dräger, 2011. "Inflation Perceptions and Expectations in Sweden - Are Media Reports the ‘Missing Link’?," KOF Working papers 11-273, KOF Swiss Economic Institute, ETH Zurich.
  5. 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.
  6. Lena Vogel & Jan-Oliver Menz & Ulrich Fritsche, 2009. "Prospect Theory and Inflation Perceptions - An Empirical Assessment," Macroeconomics and Finance Series 200903, Hamburg University, Department Wirtschaft und Politik.

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