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

Sarah Marit Lein () and Thomas Maag ()

No 08-204, KOF Working papers from KOF Swiss Economic Institute, ETH Zurich

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.

Keywords: perceived inflation; sticky information; inattention; expectation formation (search for similar items in EconPapers)
JEL-codes: E31 E50 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2008-09
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Persistent link: http://EconPapers.repec.org/RePEc:kof:wpskof:08-204

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