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Inflation Perceptions and Monetary Policy

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  • Hahn, Volker
  • Marenčák, Michal

Abstract

Consumers’ perceptions of current inflation rates depend disproportionately strongly on changes in food prices. We construct a new Keynesian model with bounded rationality that is compatible with this finding. We calibrate the model to the UK and show that, in combination with heterogeneity in sectoral price stickiness, bounded rationality leads to larger real effects of monetary-policy shocks. Moreover, price misperceptions make consumers overestimate the magnitude of aggregate real fluctuations. Consumer welfare is maximized by a central bank that takes core inflation and food prices into account in its monetary-policy making.
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Suggested Citation

  • Hahn, Volker & Marenčák, Michal, 2025. "Inflation Perceptions and Monetary Policy," VfS Annual Conference 2025 (Cologne): Revival of Industrial Policy 325361, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc25:325361
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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