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

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Author Info
Sarah M. Lein () (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
Thomas Maag () (KOF Swiss Economic Institute, ETH Zurich, Switzerland)

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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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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
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Handle: RePEc:kof:wpskof:08-204

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

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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