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Prospect Theory and Inflation Perceptions - An Empirical Assessment

Lena Vogel (), Jan-Oliver Menz () and Ulrich Fritsche ()
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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: D81 D82 E52 C33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cbe, nep-eec, nep-mon and nep-upt
Date: 2009-07
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https://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_3_2009.pdf First version, 2009 (application/pdf)

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

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