Indexation, Inflation Targeting cum Output Stabilization & Inflation Fluctuations

Textbook NK macro models have expected future inflation in the AS and IS schedules. Empirical evidence suggests that lagged inflation has higher relevance for aggregate supply. We derive an AS curve with lagged inflation expectations assuming that wage indexation is the outcome of an uncertain centralized bargaining process European style. Subsequently, we show that the FED-based hybrid objective and ECB inflation objective imply the same interest rate targeting rule. Our AS curve exhibits Brainard type multiplicative uncertainty. It is shown that the popular linearized solution around the deterministic steady state can differ widely from the truly stochastic stationary solution.