INDEXATION, STAGGERING AND DISINFLATION

Since high inflation makes very frequent price adjustments desirable, costs of taking optimal price decisions may become high, and indexatio n may emerge as an economical rule of thumb to update prices between o ptimal adjustments. We introduce indexation in a model of staggered pr ice setting, where individual prices, when not adjusted by inflation, are set optimally. We show that it is more difficult to disinflate in a model with indexation than in a standard fixed price staggering mode l: the costs associated with a given path of money disinflation are hi gher and the time necessary to stabilize an inflationary economy while keeping output at its natural level is about three times longer. As a consequence, the paper explains why disinflation may be more difficul t in high inflation economies.