Discussion Paper

No. 2007-36 | August 06, 2007
Endogenous Indexing and Monetary Policy Models

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.

JEL Classification

E22 E52 E58

Cite As

Richard Mash (2007). Endogenous Indexing and Monetary Policy Models. Economics Discussion Papers, No 2007-36, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2007-36

Assessment



Comments and Questions


Anonymous - Referee Report
October 22, 2007 - 10:36

see attached file


Anonymous - Referee Report
November 06, 2007 - 08:35

see attached file


Richard Mash - Response to Referee Reports
November 28, 2007 - 09:39

see attached file


Guido Ascari - Decision of the Associate Editor
December 11, 2007 - 11:29

see attached file