Abstract
I carry out a theoretical investigation of the relation between price indexation and inflation targeting. The analysis is performed in the context of a repeated game in which the stage game is a modified version of the model of Kydland & Prescott and Barro & Gordon. I show that, contrarily to the conventional wisdom on the subject, indexation helps to achieve an equilibrium that implements the inflation target. This finding suggest that policy actions aimed at reducing the indexation of the Brazilian economy may hinder the functioning of the inflation targeting system to the point of making it ineffective.