Perceived inflation

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, 17 entries in the bibliography, language: English, comment: 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. , 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