Saturday, June 09, 2012

German Inflation Aversion and Policy Preferences

Higher rates of inflation aversion among German citizens are frequently mentioned in the current debate as a constraint on monetary and fiscal policy in the Eurozone (see e.g. here here here). In essence, the argument is firstly that German psychological characteristics, including memories of past hyperinflations, condition German citizens to be more inflation averse. This, in turn, leads them to be more supportive of fiscal austerity measures and tighter monetary policy. Given that German politicians may share these characteristics and also need to get elected, it is argued that such characteristics constrain EU policy options to the extent that such policies rely on the support of such a large partner as Germany.

There is historical evidence supporting higher rates of inflation aversion in the German population and Issing (2005) has argued that this had a role in Bundesbank policy. Shiller's comparison of German inflation attitudes to Brazilian and US attitudes lends support to the view that Germans were more inflation averse (Shiller 1997). Support is also provided by a 2004 by paper by Kenneth Scheve. He modelled responses to the question "What do you think the NATIONAL government should give greater priority to, curbing inflation or reducing unemployment". His analysis uses the large scale comparative ISSP surveys data between 1976 and 1997. Table 3 in his paper shows country dummy coefficients in a regression model of this question. The Germany coefficient is positive and significant, meaning (with UK as base category) German citizens place more weight on inflation than UK citizens, showing similar levels of inflation aversion to New Zealand, Japan and the US. Scheve cautions against the use of the ordering from this regression without further replications. However, he makes the point that there are substantial cross-country variations in inflation aversion that should be considered when modelling issues such as choice of institutional form and variations in economic outcomes.  A 2009 ECB working paper uses World Values Survey data from the 80s and 90s to examine the extent to which memories of hyperinflation might condition higher prioritisation of inflation control. They note in a footnote in their paper that Germans, on average, have higher levels of inflation aversion than other countries. They also argue that hyperinflation experience increases inflation aversion. However, given the amount of people still alive from the German Weimar hyperinflation, it is clearly not a good explanation for German inflation aversion unless intergenerational transmission of historically-effected attitudes is happening. This working paper provides potential mechanisms whereby past inflation experience might transmit into the development of inflation attitudes across generations and the building of inflation averse institution.

Most of the evidence on inflation aversion among German citizens predates the euro. More recently, Berlemen (2011) examines Eurobarometer data from 2007-2010. Figure 1 in his paper, linked here, shows German citizens as below average in terms of their perception of inflation as a problem. However, as noted by the author, this is potentially misleading in the sense that it may be due to policy actions already addressing inflation. Thus, he reweights the answers by taking residuals of worry about inflation from an equation including actual inflation. In Figure 3 in the paper, you can see that on this measure German citizens are above average in terms of inflation concern but ranked 10th. It is hard to comment on the magnitude of the difference from the average citizen but I think it is a lot smaller than what is implied by the basic argument. It must be said though that, while the data is more recent than the Scheve paper, the Scheve measure is a more relevant measure of inflation aversion.

A recent PEW poll (full report here) conducted in US and 8 EU countries on policy attitudes in the Eurozone really does not, in my view, provide strong evidence for Germans being more inflation-focused than other countries. German citizens are happier with the EU and with economic conditions than other EU citizens but they also have substantially lower unemployment and are naturally satisfied to a great extent with job conditions than in other countries. The PEW results show Greeks, with a similar rate of inflation to Germany, being more worried about rising prices. This is a surprising result and might be a fluke of sampling but, in any case, there is no reading of the basic attitude numbers that make German citizens look oddly preoccupied with inflation. The results on page 9 suggest that Germans are no more supportive of austerity policies than French or Italian citizens. To the extent that they are opposed to direct assistance, this is a view they share with France and lag behind British citizens. Nor are they any more favourable to the ECB than other countries. As the PEW authors put it "But in public policy debates – over austerity, bailouts and budgetary sovereignty – German attitudes do not differ greatly from those of other Europeans." PEW is a well-known and reputable survey agency. However, a caveat on any single snapshot must clearly be placed. This is the most recent large-n comparative data that exists but it clearly needs to be viewed as not supporting the view that Germans have special psychological characteristics that are driving their policy preferences rather than proving they don't.

In sum, I find commentary about German national characteristics being a key driver of monetary and fiscal policy in Europe frustrating and over-simplifying. However, the paper by Scheve is convincing that there are national differences controlling for economic factors in policy preferences and it would be interesting to know more about these. The potential for intergenerational transmission might reconcile how events taking place before the vast majority of a population were born might still spillover into policy preferences. The working paper by Farvaque and Mihailov is a clear line of argument in this regard but this is very much an early stage and indicative literature.  Also, there is some evidence from surveys that Germans are more inflation averse than other countries once economic conditions are controlled for. However, this evidence is not conclusive and the most recent paper based on data in the Eurozone finds very weak evidence that German citizens are overly concerned with inflation compared to other countries. Furthermore, the scant evidence that exists on German attitudes to current policy do not show them as being particularly austerity-driven compared to French or British citizens.

If people want to make the claim that psychological characteristics of German citizens are constraining policy in the Eurozone, a lot more work would need to be conducted. Firstly, someone needs to provide convincing evidence that the current generation of Germans are indeed more inflation averse than French, UK and other EU citizens. They also need to demonstrate, contrary to the PEW findings, that this is driving attitudes to policy. Then, at the very least, a plausible model of employment effects of different eurozone options would be needed to confirm that any residual German attitude to particular monetary and fiscal policies was not simply a masked fear of unemployment or relative economic displacement. It may be possible that what people mean by German inflation-aversion is more institutional than residing in actual individual attitudes. Kevin O'Rourke makes the point that the ideas of policy-makers in Germany may be driving the German policy stance more than economic interests. It is potentially testable that German policymakers are pursuing ideological policies out of step with their voters to a greater degree than other countries but does not seem to be the case in the PEW data.


Berlemann, M. (2011). ECB Presidency and Inflation Aversion among the Citizens of European Countries: An Empirical Assessment. CESifo Forum, 2, 88-92. Retrieved from

Ehrmann, E.,  & Tzamourani, P., (2009). "Memories of high inflation," Working Paper Series 1095, European Central Bank. 

Etienne Farvaque and Alexander Mihailov (2011) Intergenerational Transmission of Inflation. Aversion: Theory and Evidence. Working Paper. Accessed April 2011. 

Issing, O, (2005). "Why Did the Great Inflation Not Happen in Germany?"  FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MARCH/APRIL, PART 2 2005

PEW Research Center:  (2012) "European Unity on the Rocks" Greeks and Germans at Polar Opposites

Scheve, K. (2004). Public Inflation Aversion and the Political Economy of Macroeconomic Policymaking. International Organization, 58(1), 1-34. doi:10.1017/S0020818304581018

Shiller, R. (1997). Why do people dislike inflation? In C. Romer & D. Romer (Eds.), Reducing inflation: Motivtion and Strategy. (pp. 13-65). Chicago and London: The University of Chicago Press. Retrieved from

1 comment:

rf said...

Only seeing this now, this is great, very informative. Although this

"The PEW results show Greeks, with a similar rate of inflation to Germany, being more worried about rising prices. This is a surprising result and might be a fluke of sampling"

Might not be so surprising when this is taken into account?

"The tripartite German, Italian and Bulgarian occupation of Greece set in train one of the most virulent hyperinflations ever recorded, five thousand times more severe than the Weimar inflation of the early 1920s. Price levels in January 1946 were more than five trillion times those of May 1941. The exchange rate for the gold sovereign in the autumn of 1944, shortly after the liberation, stood at 170 trillion drachmas. By that time, Davis’s pile of notes would scarcely have been enough to buy a loaf of bread." (LRB 5the July Richard Clogg)