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Sticky Information versus Efficient Indexation Microfoundations for Monetary Policy Models

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  • Richard Mash

Abstract

We present an “efficient indexation” approach to price setting when full optimisation is infrequent due to decision making costs but firms observe relevant information between optimisations. Prices are updated in line with the structural characteristics of the economy and hence make efficient use of available information. Under plausible conditions this mechanism is superior to the predetermined prices of Mankiw and Reis (2002) [Sticky information versus sticky prices: A proposal to replace the New Keynesian Phillips Curve, Quarterly Journal of Economics, 117(4)]. If infrequent optimisation is caused by lack of information, indexing is infeasible and the Mankiw-Reis approach is optimal.

Suggested Citation

  • Richard Mash, 2008. "Sticky Information versus Efficient Indexation Microfoundations for Monetary Policy Models," CDMA Conference Paper Series 0811, Centre for Dynamic Macroeconomic Analysis.
    • Handle: RePEc:san:cdmacp:0811
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    File URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0811.pdf
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    More about this item

    Keywords

    Sticky Information; Rational Inattention; Indexing; Monetary Policy; Microfoundations.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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