Costly Inflation Misperceptions

University of Heidelberg Department of Economics Discussion Paper No. 455

19 Pages Posted: 23 Nov 2007

See all articles by Thomas A. Eife

Thomas A. Eife

Heidelberg University - Alfred Weber Institute for Economics

Stephan Maier

Caribbean Development Bank

Date Written: October 2007

Abstract

One of the consequences of the euro changeover in 2002 was that for a period of several years people considerably overestimated actual inflation. The goal of this paper is to study whether misperceptions of this kind may have real effects, that is, whether they induce people to alter their behaviour. We also discuss the question how far the euro changeover and the ensuing discussion about price stability contributed to the recession that followed the changeover. Looking at the German restaurant sector, we find that people's misperceptions can have significant negative effects. The contraction this sector experienced in the months after the changeover was too pronounced to be explained by normal business cycle movements. We provide a discussion about the causes of these misperceptions and how to avoid them in future changeovers.

Keywords: euro changeover, perceived inflation

JEL Classification: D12, E21, C22

Suggested Citation

Eife, Thomas Albert and Maier, Stephan, Costly Inflation Misperceptions (October 2007). University of Heidelberg Department of Economics Discussion Paper No. 455, Available at SSRN: https://ssrn.com/abstract=1022610 or http://dx.doi.org/10.2139/ssrn.1022610

Thomas Albert Eife (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Stephan Maier

Caribbean Development Bank ( email )

P.O. Box 408
Wildey
St. Michael W.I. BB11000
Barbados