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

Listed author(s):
  • Sarah M. Lein
  • Thomas Maag

This paper investigates how households form their perceptions of consumer price inflation. Using data from the harmonized EU consumer survey, we find that inflation perceptions are inefficient and highly heterogeneous, yet contemporaneously related to the actual rate of inflation. Consequently, we estimate how often households update their beliefs employing Carroll's (2003) epidemiological model. Our results indicate that inflation perceptions are generally less responsive to new information than expectations. Unlike studies on expectations, we cannot confirm that a constant fraction of the population updates information every month. Also, the cross-sectional heterogeneity of perceptions is higher than implied by infrequent updating alone.

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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
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0036-9292

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