Geldpolitik; Zentralbank; Inflationsbekämpfung; Inflation; Angst; EU-Staaten

Michael Berlemann

English

Research Papers in Economics

CESifo Forum 2/2011 88
Special
ECB PRESIDENCY AND
INFLATION AVERSION AMONG
THE CITIZENS OF EUROPEAN
COUNTRIES: AN EMPIRICAL
ASSESSMENT
MICHAEL BERLEMANN*
Introduction
In October 2011 the regular term of office of the cur-
rent President of the European Central Bank (ECB)
Jean-Claude Trichet expires. Somewhat unexpectedly,
the favorite candidate as successor, Bundesbank
President Axel Weber, declared his resign in early
February. In the aftermath speculation has been
mounting about who will take over the job as the
head of the ECB. As it is often the case in interna-
tional organizations and especially the European
Union, the discussion about the candidates was dom-
inated by their nationalities. While many specialists
considered the Bank of Italy chief Mario Draghi to
be the best qualified and most natural candidate for
the ECB presidency, others argued that Italy’s record
of high inflation and massive debt would make
Draghi an inacceptable candidate, especially for
countries claiming to have a deeply rooted stability
culture like Germany. Consequently, German
Chancellor Angela Merkel initially hesitated to sup-
port Draghi and considered supporting another
Dutchman, Nout Wellink, coming from a country
with (perceived) similar macroeconomic preferences.
Even when Silvio Berlusconi and Nicolas Sarkozy
announced to support Draghi in late April it took
another 3 weeks before Angela Merkel was willing to
support the Italian candidate. The major reasoning
behind the discussion of the candidates’ nationalities
bases on the expectation that citizens from different
European countries exhibit differing degrees of infla-
tion aversion which carry over to the presidents of
their central banks. 
In fact, there is some empirical evidence in favor of
the hypothesis that the degree of inflation aversion
differs between countries. For example, Shiller
(1997) finds the average percentage of US and
Brazilian citizens fully agreeing with the statement
that controlling inflation to be one of the most
important tasks of economic policy to be 56 percent
while the referring percentage of the German citi-
zens is 76 percent and thus considerably larger.
Similarly, Scheve (2004) finds significant national
differences in inflation aversion in his study of
20 countries around the globe. However, empirical
evidence on the degree of inflation aversion among
EU member states is yet not available.
In this article we aim at shedding some light on the
degrees of inflation aversion among the citizens of
EU member countries. We therefore employ aggregate
data collected from the Eurobarometer Survey of the
European Commission covering 2007 to 2010.1 After
briefly discussing possible causes for inflation aver-
sion, presenting the utilized data, explaining the
empirical approach and presenting the estimation
results we turn to a discussion of the implications of
our results for the question who should become the
next ECB president.
Possible Causes of Inflation Aversion
Inflation aversion is the result of the likely effects of
both anticipated and unanticipated inflation. The
effects of inflation on microeconomic behavior and
macroeconomic outcomes have been subject to 
excessive discussions among economists (see e.g.
Briault 1995; Edey 1994). There is little disagreement
on the effects of inflation on nominal variables. Most
economists agree that higher inflation leads to one to
one increase in nominal wages or nominal interest
rates, provided that there are no institutional barriers
to adjustments (Parkin 1994). Most economists will
also agree that inflation causes different sorts 
of transaction costs such as shoe-leather costs
(Bailey 1956; Briault 1995), menu costs (Manki 1992)
* Helmut Schmidt University Hamburg.
1 Focusing on this period allows covering all actual EU member
countries plus Turkey as an EU candidate.CESifo Forum 2/2011 89
Special
or bureaucratic costs (Karmann and Graff 1997).
However, it is less clear in how far inflation exerts
effects on economic growth and/or unemployment.
While some authors argue that inflation positively
affects economic growth (Mundell 1963 and 1965),
the opposite view results from overlapping genera-
tions models (see e.g. Samuelson 1958; Wallace 1980).
However, there are also models in which inflation is
‘super-neutral’ (Sidrausky 1967). The empirical evi-
dence is also somewhat mixed (see e.g. Kormendi and
Meguire 1985; Grimes 1991; Barro 1995; Sarel 1996).
Inflation might also have re-distributional effects.
According to the wage-lag hypothesis prices tend to
run ahead of increases in money wages, leading to
lower real wages and increased profits (Keynes 1940).
According to the transfer-income-lag hypothesis mar-
ket incomes (wages, profits) react considerably quick-
er on inflation than primarily politically or institu-
tionally determined transfer incomes like pensions,
unemployment benefits or welfare aids (Pohl 1981).
The debtor-creditor hypothesis argues that wealth 
is redistributed from creditors to debtors when-
ever inflation is not fully anticipated in loan contracts.
Again, the empirical evidence is mixed (Li and 
Zou 2002).
Interestingly enough, a significant share of the pop-
ulation seems to have neither a clear idea of what the
typical causes of inflation are nor which conse-
quences result from inflation (see Shiller 1997).
Nevertheless, the public is typically much concerned
with inflation. For example, DiTella, MacCulloch
and Oswald (2001) find inflation to contribute sig-
nificantly to explain life satisfaction on the cross-
country level when studying data for 12 European
countries from the Euro  barometer Database over the
period 1975 to 1991.
Data
For our study we employ data
from the Eurobarometer, a survey
conducted biannually by the
European Commission. The stan-
dard Eurobarometer was estab-
lished in 1973. Each survey con-
sists of approximately 1,000 face-
to-face interviews per member
state.2 Since the number of member states increased in
the course of time and also some of the accession
countries are included, the number of surveyed coun-
tries varies from survey to survey. We make use of
aggregate data from the Eurobarometer provided by
Zentralarchiv für Empirische Sozialforschung (ZA).3
Our dataset covers the 7 waves of the Eurobarometer
survey: Spring 2007 (EB 67) to Spring 2010 (EB 73).
In order to measure inflation aversion we focus on the
answers on the question: ‘what do you think are the
two most important issues facing (OUR COUNTRY)
at the moment?’ This question was asked in all 7 waves
and every EU member country. The respondents
could choose up to two answers from the following
catalogue: crime, economic situation, rising prices\
inflation, taxation, unemployment, terrorism,
defence\foreign affairs, housing, immigration, health-
care system, educational system, pensions, environ-
ment and energy.
In Figure 1 we show the average percentage of respon-
dents per country answering ‘rising prices\inflation’ to
be among the two most important problems.
Obviously, the percentages differ considerably
between the EU member countries. The citizens of the
Scandinavian EU member countries mention infla-
tion quite rarely among the most important problems.
On average only 1 out of twenty respondents from
Sweden answered inflation to be one of the most
important problems. The percentages are only slightly
higher in Denmark (8 percent), the Netherlands
(11 percent), Turkey (12 percent), Britain (12 percent),
Spain (18 percent), Ireland (20 percent) and Finland
(20 percent). The countries with the citizens most
often answering inflation to be among the most
2 Exceptions are Germany (2,000), Lu  -
xembourg (500) and Britain (1,300 includ-
ing 300 in Northern Ireland). 
3 We make use of the Eurobarometer
waves EB 67 to EB 73.
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50
Sweden
Denmark
Netherlands
Turkey
UK
Spain
Ireland
Finland
Poland
Slovakia
Germany
France
Czech Rep.
Belgium
Greece
Luxembourg
Cyprus
Hungary
Italy
Portugal
Estonia
Romania
Bulgaria
Malta
Slovenia
Austria
Lithuania
Latvia
Source: Own calculations based on Eurobarometer survey (2007–2010).
  IMPORTANCE OF INFLATION AS A MAIN PROBLEM IN THE EU COUNTRIES
Results of the Eurobarometer (2007–2010) 
average percentage of respondents answering inflation in %
Figure 1CESifo Forum 2/2011 90
Special
important problems facing the country are Latvia
(45 percent), Lithuania (44 percent), Austria (41 per-
cent), Slovenia (40 percent) and Malta (40 percent).
Germany, which is often judged to be one of the
countries with the most inflation-averse citizens,
ranges in the middle of the field of the members states
of the European Union (31 percent). 
However, the pure percentage of citizens, identifying
inflation as major problem is not informative with
respect to their inherent degree of inflation aversion.
This becomes obvious when considering the usually
employed loss function in macroeconomic models.
Typically, this loss function is assumed to be of the
type
(1)
with lt = the loss in period t, π = inflation, π* =
socially optimal inflation, y = output, and y* =
socially optimal output. The parameters α and β are
weighting factors with α being the degree of infla-
tion aversion.
Whenever a respondent answers inflation to be among
the most important problems this answer might mean
two different things. It is well possible that the respon-
dent has the intention to reveal a high degree of infla-
tion aversion, i.e. a comparatively high value for α.
However, it is also possible that his answer is reflect-
ing the opinion that the current inflation rate deviates
excessively from its socially optimal value. As Figure 2
reveals, there seems to be in fact a positive correlation
between actual inflation (measured as the average
inflation rate in the three months before the
Eurobarometer wave was completed) and the answers
of the respondents. 
Uncovering citizens’ inflation aversion
In order to uncover the true degree of inflation aver-
sion among the citizens of the EU member countries
it is thus necessary to relate the answers of the respon-
dents to the inflation performance at the time and
place when the survey was conducted. In order to do
so, we employ a two-step procedure. In the first step
we pool the data and then regress the percentage of
citizens, answering inflation to be among the most
important problems (m), on the average inflation rate
(π) in the three months before the referring
Eurobarometer wave was completed. Thus, the equa-
tion to be estimated is
(2)
In the second step we employ the estimated constant
c   ˆ and the parameter  ˆ to calculate the unexplained
residuals  εi,t. We then use the average unexplained
residual as indicator for country i’s inflation aversion. 
As an alternative to the described procedure we
could also estimate the regression with country-fixed
effects and interpret the fixed effects as measure of
inflation aversion. Since the results turn out to be
very similar we refrain from reporting the results
here in length.
Estimation results
The estimation results of step 1
are shown in Table 1. Both the
regression constant and the coef-
ficient turn out to be significant
at the 99%-confidence-level. As
expected, the coefficient of infla-
tion turns out to be positive. The
regression equation explains
roughly 25 percent of the
observed variation of the depen-
dent variable.
The resulting measures of in-
flation aversion are presented in
Figure 3. For 18 out of the
 
2 *
t
2 *
t t y y
2
1
2
1
l   E   S  S  D     
1
2
3
4
5
6
7
8
9
10
0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5
Sources: Own calculations based on Eurobarometer survey (2007–2010); Eurostat.
CORRELATION BETWEEN ACTUAL INFLATION AND RESPONDENTS' 
ASSESSMENT ON ITS IMPORTANCE AS A PROBLEM 
The Eurobarometer (2007–2010)
average inflation in %
average % of respondens answering inflation
Figure 2
mi,t = c+γ ⋅πi,t +εi,t CESifo Forum 2/2011 91
Special
28 sample countries we end up with positive average
estimation errors, indicating that the citizens of these
countries belong to the above average inflation averse
ones. The countries with the highest degrees of infla-
tion aversion turn out to be Austria, Malta, Portugal,
Slovenia and Italy. The lowest degrees of inflation
aversion can be found in Turkey, Sweden, Denmark,
the United Kingdom and the Netherlands. While the
German citizens show above-average inflation aver-
sion, Germany is not among the most inflation-averse
countries.
Conclusions
In the light of the presented empirical results, the
recent discussion about the succession of Jean Claude
Trichet as the next ECB President appears to be mis-
leading. At least two aspects should be mentioned.
First, one might ask the question, why the national-
ity of the candidates should play a role for the deci-
sion at all. While from a political perspective it
might be necessary to divide up the influential jobs
in the EU administration equally or at least propor-
tionally among the member countries, it makes little
sense to base the decision solely or primarily on the
presumption of the degree of inflation aversion
among the citizens in the country of origin of the
candidate. Since Rogoff’s (1985) seminal contribu-
tion it is well-known that countries typically are bet-
ter off when choosing a weight-conservative central
bank president. One might expect that many EU
member countries made use of this option. Thus,
the citizens’ and the central banker’s degree of infla-
tion aversion might differ considerably in most
(European) countries. 
Second, when in fact the citizens’ degree of inflation
aversion would be connected to the preferences of the
referring central banker, the recent discussion was
quite misleading. While Italy’s citizens are among the
5 most inflation averse EU member countries, Bank of
Italy’s President Mario Draghi was suspected for being
not enough averse to inflation to become the ECB
President. Instead, Finland’s Erkki Liikanen and the
Dutch Nout Wellink were discussed intensively as can-
didates for the job. However, the reported empirical
results indicate that both coun-
tries rank among the below-aver-
age inflation-averse EU member
countries. Thus, Mario Draghi
might turn out to be much more
‘hawkish’ than many expect.
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Table 1 
Estimation results 
Variable Coefficient S td. Error  t-Statistic Prob. 
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Inflation (π)  0.024586 0.002897 8.487803  0.0000 
Adjusted r
2 0.247252 
65.05071 
0.000000 
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Notes: Dependent variable = Respondents stating inflation  to be among the most important problems in 
percent (m). We report White-corrected standard errors.  
Source: Own calculations. 
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Figure 3CESifo Forum 2/2011 92
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Inflation and Economic Growth”,

Preferences over Inflation

The Costs of Inflation”,

The Welfare Cost of Inflationary Finance”,

ECB Presidency and Inflation Aversion among the Citizens of European Countries:
An Empirical Assessment

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ECB Presidency and Inflation Aversion among the Citizens of European Countries: An Empirical Assessment

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