Richard Mash

Endogenous Indexing and Monetary Policy Models

August 06, 2007

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.

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

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

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

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

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