Publication

This paper considers the implications of firms choosing the optimal degree of indexation so their simple pricing rules deliver prices as close as possible to those which would be chosen optimally. The author finds 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. He also studies 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 characterized by zero indexation and zero macroeconomic persistence.