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The Formation Of Inflation Perceptions: Some Empirical Facts For European Countries

  • Sarah M. Lein
  • Thomas Maag

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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Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 58 (2011)
Issue (Month): 2 (05)
Pages: 155-188

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Handle: RePEc:bla:scotjp:v:58:y:2011:i:2:p:155-188
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