One of the two price indexation schemes in the staggered price DSGE models is the indexation to the average inflation. In this essay we show that using average of inflation as index multiplier may lead to the deviation from the optimal price for intermediate good producer. Although there is no...

One of the two price adjustment (indexation) schemes for the intermediate good producers, in the staggered price Dynamic Stochastic General Equilibrium (DSGE) models is the indexation to the average inflation. In this essay we show that using average of inflation as index multiplier may lead to...