Prospect Theory and Inflation Perceptions - An Empirical Assessment

Lena Vogel (), Jan-Oliver Menz and Ulrich Fritsche
Additional contact information
Lena Vogel: Department for Economics and Politics, University of Hamburg
Authors registered in the RePEc Author Service: Lena Dräger

No 200903, Macroeconomics and Finance Series from University of Hamburg, Department of Socioeconomics

Abstract: Building on the hypotheses of loss aversion with respect to price increases and availability of frequently bought goods, Brachinger (2006,2008) constructs an alternative index of perceived inflation (IPI), which can reproduce the jump in the measure for perceived inflation after the Euro introduction in Germany that was not observable in standard HICP inflation. We test the hypotheses of Prospect Theory with regard to households’ inflation perceptions underlying Brachinger’s IPI in a panel estimation for 12 European countries. There is evidence that perceptions react more strongly to ‘losses’ in inflation than to ‘gains’ before the Euro cash changeover, but not afterwards. Moreover, we find empirical support for the availability hypothesis, stating that frequently bought goods have a stronger influence on inflation perceptions than the overall price index.

Keywords: Inflation Perceptions; Prospect Theory; Dynamic Panel (search for similar items in EconPapers)
JEL-codes: C33 D81 D82 E52 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2009-07
New Economics Papers: this item is included in nep-cba, nep-cbe, nep-eec, nep-mon and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_3_2009.pdf First version, 2009 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hep:macppr:200903

Access Statistics for this paper

More papers in Macroeconomics and Finance Series from University of Hamburg, Department of Socioeconomics Contact information at EDIRC.
Bibliographic data for series maintained by Ulrich Fritsche ( this e-mail address is bad, please contact ).