Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103183
Authors: 
Dräger, Lena
Menz, Jan-Oliver
Fritsche, Ulrich
Year of Publication: 
2011
Series/Report no.: 
DEP (Socioeconomics) Discussion Papers, Macroeconomics and Finance Series 5/2011
Abstract: 
Building on Prospect Theory, we apply the concept of loss aversion to the formation of inflation perceptions and test empirically for non- linearities in the inflation-perceptions relation for a panel of 10 Euro area countries. Specifically, under the assumption of loss aversion, inflation changes above a certain reference rate will be perceived more strongly. Rejecting rationality of inflation perceptions in general under symmetric loss and in a majority of cases under flexible loss functions, panel smooth transition models give evidence of non-linearities in the inflation perception formation regarding both actual inflation and time. This result is confirmed by dynamic fixed effects estimates, where the slope of the estimated value function is significantly steeper in the loss region and the implied average reference inflation rate is found close to 2%.
Subjects: 
Inflation Perceptions
Loss Aversion
Panel Smooth Tran- sition Models
Dynamic Panel
JEL: 
C33
D81
D82
E31
Document Type: 
Working Paper

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