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Endogenous Indexing and Monetary Policy Models

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  • Mash, Richard

Abstract

Models in which firms use a rule of thumb or partial indexing in price setting are prominent in the recent monetary policy literature. The extent to which these firms adjust their prices to lagged inflation has been taken as fixed. We consider the implications of firms choosing the optimal degree of indexation so these simple pricing rules deliver prices as close as possible to those which would be chosen optimally. We find that the degree of indexation depends on the extent of persistence in the economy such that models with constant indexation are vulnerable to the Lucas critique. We also study the interactions between firms? price setting and the macroeconomic environment finding that, for the models which appear most plausible on microeconomic grounds, the Nash equilibrium between firms and the policy maker is characterised by zero indexation and zero macroeconomic persistence.

Suggested Citation

  • Mash, Richard, 2007. "Endogenous Indexing and Monetary Policy Models," Economics Discussion Papers 2007-36, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:6163
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    References listed on IDEAS

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    Cited by:

    1. Julio A. Carrillo & Gert Peersman & Joris Wauters, 2013. "Endogenous Wage Indexation and Aggregate Shocks," Working Papers 2013-19, Banco de México.
    2. Yao, Fang, 2009. "Time-dependent pricing and New Keynesian Phillips curve," Discussion Paper Series 1: Economic Studies 2009,08, Deutsche Bundesbank, Research Centre.

    More about this item

    Keywords

    Indexing; Monetary Policy; Phillips Curve; Inflation Persistence; Microfoundations;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • 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

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