Perceived inflation E-Book

Sebastian Sturm

• Herausgeber: GRIN Verlag
• Sprache: Englisch

Veröffentlichungsjahr: 2007

Beschreibung

Seminar paper from the year 2007 in the subject Economics - Monetary theory and policy, grade: 1,7, Technical University of Chemnitz, course: Methoden der Inflationsmessung, language: English, abstract: The purpose of this paper is to give the reader an understanding of Brachingers new developed theory of perceived inflation. Additionally, Brachingers new developed Index of Perceived Inflation is introduced analyzed and critically reviewed. Therefore the term paper is structured as followed: To understand the basic underlying of Brachingers theory, it is necessary to refer to the Prospect Theory, developed by Kahneman and Tversky in 1979. The main focus from Prospect theory is laid on its assumptions. In detail, the first section starts with a brief thought experiment. Afterwards the concept of reference dependency and loss aversion will be introduced. The second part of this paper deals with Brachingers work on the theory as well as on the Index of Perceived Inflation. It is shown how Brachinger derived his index from the general Laspeyres formula by adjusting for several restrictions from the Prospect theory. This chapter closes by presenting Brachingers results of perceived inflation for Germany in comparison to the actual rate of inflation after the currency changeover. The last part of this work deals with the criticism on Brachingers new developed theory. In particular, it is shown that Brachingers assumptions and simplifications are inappropriate to fully explain the phenomenon of perceived inflation. Moreover, it is illustrated that Brachingers results are inconsistent with empirical results. Finally, the paper ends up with alternative explanations which are probably capable to explain the inflation as perceived. Lastly, a conclusion is drawn which will sum up the results and the ability whether perceived inflation is revealed or not.

Leseprobe

Table of Content

List of Abbreviations

1. Introduction.

2. Methodology.

3. A brief Introduction to Prospect Theory.

3.1 A thought experiment

3.2 Reference dependency

3.3 Loss aversion.

4. Brachingers Index of Perceived Inflation (IPI)

4.1 The consumer price index as a general Laspeyres type formula

4.2 Index of perceived Inflation (IPI)

4.3 Derivation of frequency weights

4.4 Perceived Inflation in Germany after the currency changeover.

5. Criticism on Index of Perceived Inflation (IPI)

5.1 Assumptions adopted from the Prospect Theory.

5.2 Additional Assumptions of the Index of Perceived Inflation.

5.3 Comparison with the European Consumer Survey.

5.4 Other effects on perceived inflation in 2002

6. Results and Conclusion.

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List of Abbreviations

CPI Consumer Price Index DM Deutsch Mark € Euro EVS Income and Consumption Survey EU European Union e.g. for example FSO Federal Statistical Office i.e. that is IPI Index of Perceived Inflation

Page 1

1. Introduction

The introduction of the Euro as a legal tender in the beginning of 2002 was followed by a controversial debate on the alleged inflationary effects of the new currency. Particularly, in Germany, as well as in the rest of the Euro area, survey-based measures signaled a much sharper rise in inflation than measured by the official price indices, whose quality was called into question. In fact, the average inflation in the Euro zone turned out to be not exceptionally high. Therefore the launch of the Euro was considered as a success. However, it is puzzling that most EU citizens think that the introduction of the Euro has caused a price increase. Around 70 percent of the people believe that prices have been rounded up. From figure 12 in the appendix it can be seen that in the Euro zone perceived inflation significantly exceeds actual inflation only in the post Euro period. Further on it is noteworthy that this fact does not seem to be the case in non-Euro countries like Sweden, Denmark and the United Kingdom.

Based on that discrepancy, Wolfgang Brachinger developed, in cooperation with the Federal Statistical Office of Germany, a new theory to describe and quantify the phenomenon of perceived inflation in Germany. Nevertheless, his work has caused a controversial debate on the issue of measuring inflation respectively perceived inflation. Thus, the aim of this paper is to present Brachingers theory on the Index of Perceived Inflation (IPI) as well as the criticism on his work.