Inflation Perceptions and Monetary Policy

Volker Hahn () and Michal Marencak ()
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Volker Hahn: University of Konstanz
Michal Marencak: National Bank of Slovakia

No WP 4/2025, Working and Discussion Papers from Research Department, National Bank of Slovakia

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.

JEL-codes: D01 E50 E52 E70 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2025-05
New Economics Papers: this item is included in nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1119

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