Price Indexation and Optimal Simple Rules in a Medium Scale New Keynesian Model

Abstract

Indexation was the subject of a substantial literature in the era of high in‡ation, but it was then neglected. Recently, it is becoming standard to assume backward looking indexation in prices in the New Keynesian DSGE models. Given the backward looking indexation scheme, we study how the degree of indexation a¤ects the optimal simple policy rule in a medium-scale model. We show that both the shape and the parameters of the simple policy rule are a¤ected by the degree of indexation. In particular, indexation stabilizes price dispersion, thus optimal monetary policy does not need to focus on stabilizing in‡ation. We also show that full indexation is a very peculiar assumption, eliminating the price dispersion mechanism in the model. JEL classi…cation: E31, E52.

18 Figures and Tables

Cite this paper

@inproceedings{Ascari2008PriceIA, title={Price Indexation and Optimal Simple Rules in a Medium Scale New Keynesian Model}, author={Guido Ascari and Nicola Branzoli}, year={2008} }