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Perceptual noise and perceived inflation after the Euro currency changeover

Author

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  • Lunn, Peter D.
  • Duffy, David

Abstract

Following the Euro changeover in January 2002, Euro Area consumers perceived an increase in inflation of striking magnitude and persistence, despite low and stable recorded inflation. We offer a behavioural analysis that rationalises this apparent economic illusion. We propose that the changeover induced perceptual noise that increased consumers’ uncertainty when assessing transaction surpluses, leading them to experience reduced value for money in the marketplace. This perceptual noise theory is consistent with the timing and persistence of the illusion. It predicts a positive relationship between overestimation of inflation and a contemporaneous measure of consumers’ subjective difficulty using the new currency, which we confirm using panel data for Euro Area countries. The theory also implies a simultaneous downward shift in expected inflation, which we also confirm. The analysis has implications for models of household decision-making, assumptions of rationality in economic theory and policy surrounding currency changeovers.

Suggested Citation

  • Lunn, Peter D. & Duffy, David, 2015. "Perceptual noise and perceived inflation after the Euro currency changeover," Journal of Behavioral and Experimental Finance, Elsevier, vol. 7(C), pages 1-16.
    • Handle: RePEc:eee:beexfi:v:7:y:2015:i:c:p:1-16
    DOI: 10.1016/j.jbef.2015.04.001
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    Cited by:

    1. Coccia, Mario, 2016. "The relation between price setting in markets and asymmetries of systems of measurement of goods," The Journal of Economic Asymmetries, Elsevier, vol. 14(PB), pages 168-178.
    2. Pooja Kapoor & Sujata Kar, 2023. "A review of inflation expectations and perceptions research in the past four decades: a bibliometric analysis," International Economics and Economic Policy, Springer, vol. 20(2), pages 279-302, May.
    3. Jarko Fidrmuc & Katarína Danišková, 2020. "Meta-Analysis of the New Keynesian Phillips Curve in Developed and Emerging Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(1), pages 10-31, January.
    4. Petar Soric, 2024. "The euro and inflation in Croatia: much ado about nothing?," Public Sector Economics, Institute of Public Finance, vol. 48(1), pages 1-37.

    More about this item

    Keywords

    Inflation; Price perception; Expectations; Euro; Currency changeover; Price change;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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