Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153022
Authors: 
Ehrmann, Michael
Year of Publication: 
2006
Series/Report no.: 
ECB Working Paper 588
Abstract: 
This paper uses the euro cash changeover to test theories of finite informationprocessing capacities on the side of consumers. It argues that the denomination of prices in a new currency has increased the information-processing requirements for consumers by more than for sellers, a wedge that can lead to price increases. The size of the wedge should depend on the complexity of the currency conversion rates. In line with this theory, the paper finds that the evolution of prices for food products around the cash changeover varied across countries, depending on the complexity of conversion rates. These changeover effects are found in particular for goods with prices below one euro sold in mid-priced stores. The paper also finds that cross-country differences in the mismatch of perceived and actual inflation in the aftermath of the cash changeover are linked to differences in the complexity of conversion rates.
Subjects: 
euro cash changeover
perceived inflation
rational inattention
JEL: 
D84
E31
E58
L11
Document Type: 
Working Paper

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