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The Euro Through the Looking-Glass: Perceived Inflation Following the 2002 Currency Changeover

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  • Lunn, Pete
  • Duffy, David

Abstract

Following the Euro changeover in January 2002, consumers across the Euro Area perceived a sharp rise in inflation, in contrast to official figures. Several theories have been advanced to explain this apparent economic illusion, but they struggle to account for its striking scale and persistence. We offer an alternative account, based on the premise that the currency changeover increased consumers' perceptual error when assessing the value of monetary amounts. Under plausible assumptions, this would lead them to experience a loss of purchasing power. We confirm two empirical hypotheses in support of the theory: (1) the extent of overestimation of inflation was strongly associated with subjective difficulty using the Euro; (2) there was a simultaneous downward shift in expected inflation. Our results imply that currency changeovers are not simple matters of numerical conversion.

Suggested Citation

  • 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).
  • Handle: RePEc:esr:wpaper:wp338
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    References listed on IDEAS

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    Cited by:

    1. Gorecki, Paul K. & Lyons, Sean & Tol, Richard S.J., 2011. "Public policy towards the sale of state assets in troubled times: Lessons from the Irish experience," Utilities Policy, Elsevier, vol. 19(3), pages 193-201.
    2. Anthoff, David & Rose, Steven & Tol, Richard S. J. & Waldhoff, Stephanie, 2011. "Regional and sectoral estimates of the social cost of carbon: An application of FUND," Economics Discussion Papers 2011-18, Kiel Institute for the World Economy (IfW).
    3. Devitt, Conor & Diffney, Seán & FitzGerald, John & Malaguzzi Valeri, Laura & Tuohy, Aidan, 2011. "Goldilocks and the Three Electricity Prices: Are Irish Prices "Just Right"?," Papers WP372, Economic and Social Research Institute (ESRI).
    4. Tol, Richard S. J., 2010. "The Research Output of Business Schools and Business Scholars in Ireland," Papers WP364, Economic and Social Research Institute (ESRI).
    5. Gorecki, Paul K. & Tol, Richard S. J., 2011. "The Climate Change Response Bill 2010: An Assessment," Papers WP371, Economic and Social Research Institute (ESRI).

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    Keywords

    consumer behaviour/Euro changeover/inflation expectations/inflation perceptions/uncertainty;

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