As ever, the terminology people use is not entirely consistent.  There's a variety of inspired-by-monads-but-strictly-speaking-isn't-quite notions.  The term "indexed monad" is one of a number (including "monadish" and "parameterised monad" (Atkey's name for them)) of terms used to characterize one such notion. ( Another such notion, if you're interested, is Katsumata's "parametric effect monad", indexed by a monoid, where return is indexed neutrally and bind accumulates in its index.) 

First of all, let's check kinds. 

IxMonad (m :: state -> state -> * -> *)

That is, the type of a "computation" (or "action", if you prefer, but I'll stick with "computation"), looks like

m before after value

where before, after :: state and value :: * .  The idea is to capture the means to interact safely with an external system that has some predictable notion of state.  A computation's type tells you what the state must be before it runs, what the state will be after it runs and (like with regular monads over * ) what type of value s the computation produces. 

The usual bits and pieces are * -wise like a monad and state -wise like playing dominoes. 

ireturn :: a -> m i i a -- returning a pure value preserves state ibind :: m i j a -> -- we can go from i to j and get an a, thence (a -> m j k b) -- we can go from j to k and get a b, therefore -> m i k b -- we can indeed go from i to k and get a b

The notion of "Kleisli arrow" (function which yields computation) thus generated is

a -> m i j b -- values a in, b out; state transition i to j

and we get a composition

icomp :: IxMonad m => (b -> m j k c) -> (a -> m i j b) -> a -> m i k c icomp f g = \ a -> ibind (g a) f

and, as ever, the laws exactly ensure that ireturn and icomp give us a category

ireturn `icomp` g = g f `icomp` ireturn = f (f `icomp` g) `icomp` h = f `icomp` (g `icomp` h)

or, in comedy fake C/Java/whatever,

g(); skip = g() skip; f() = f() {g(); h()}; f() = h(); {g(); f()}

Why bother?  To model "rules" of interaction.  For example, you can't eject a dvd if there isn't one in the drive, and you can't put a dvd into the drive if there's one already in it.  So

data DVDDrive :: Bool -> Bool -> * -> * where -- Bool is "drive full?"  DReturn :: a -> DVDDrive i i a DInsert :: DVD -> -- you have a DVD DVDDrive True k a -> -- you know how to continue full DVDDrive False k a -- so you can insert from empty DEject :: (DVD -> -- once you receive a DVD DVDDrive False k a) -> -- you know how to continue empty DVDDrive True k a -- so you can eject when full instance IxMonad DVDDrive where -- put these methods where they need to go ireturn = DReturn -- so this goes somewhere else ibind (DReturn a) k = k a ibind (DInsert dvd j) k = DInsert dvd (ibind j k) ibind (DEject j) k = DEject j $ \ dvd -> ibind (j dvd) k

With this in place, we can define the "primitive" commands

dInsert :: DVD -> DVDDrive False True () dInsert dvd = DInsert dvd $ DReturn () dEject :: DVDrive True False DVD dEject = DEject $ \ dvd -> DReturn dvd

from which others are assembled with ireturn and ibind .  Now, I can write (borrowing do -notation)

discSwap :: DVD -> DVDDrive True True DVD discSwap dvd = do dvd' <- dEject; dInsert dvd ; ireturn dvd'

but not the physically impossible

discSwap :: DVD -> DVDDrive True True DVD discSwap dvd = do dInsert dvd; dEject -- ouch! 

Alternatively, one can define one's primitive commands directly

data DVDCommand :: Bool -> Bool -> * -> * where InsertC :: DVD -> DVDCommand False True () EjectC :: DVDCommand True False DVD

and then instantiate the generic template

data CommandIxMonad :: (state -> state -> * -> *) -> state -> state -> * -> * where CReturn :: a -> CommandIxMonad c i i a (:?) ::  c i j a -> (a -> CommandIxMonad c j k b) -> CommandIxMonad c i k b instance IxMonad (CommandIxMonad c) where ireturn = CReturn ibind (CReturn a) k = k a ibind (c :?  j) k = c :? \  a -> ibind (j a) k

In effect, we've said what the primitive Kleisli arrows are (what one "domino" is), then built a suitable notion of "computation sequence" over them. 

Note that for every indexed monad m , the "no change diagonal" m i i is a monad, but in general, m i j is not.  Moreover, values are not indexed but computations are indexed, so an indexed monad is not just the usual idea of monad instantiated for some other category. 

Now, look again at the type of a Kleisli arrow

a -> m i j b

We know we must be in state i to start, and we predict that any continuation will start from state j .  We know a lot about this system!  This isn't a risky operation!  When we put the dvd in the drive, it goes in!  The dvd drive doesn't get any say in what the state is after each command. 

But that's not true in general, when interacting with the world.  Sometimes you might need to give away some control and let the world do what it likes.  For example, if you are a server, you might offer your client a choice, and your session state will depend on what they choose.  The server's "offer choice" operation does not determine the resulting state, but the server should be able to carry on anyway.  It's not a "primitive command" in the above sense, so indexed monads are not such a good tool to model the unpredictable scenario. 

What's a better tool? 

type f :-> g = forall state.  f state -> g state class MonadIx (m :: (state -> *) -> (state -> *)) where returnIx :: x :-> m x flipBindIx :: (a :-> m b) -> (m a :-> m b) -- tidier than bindIx

Scary biscuits?  Not really, for two reasons.  One, it looks rather more like what a monad is, because it is a monad, but over (state -> *) rather than * .  Two, if you look at the type of a Kleisli arrow,

a :-> m b = forall state.  a state -> m b state

you get the type of computations with a precondition a and postcondition b , just like in Good Old Hoare Logic.  Assertions in program logics have taken under half a century to cross the Curry-Howard correspondence and become Haskell types.  The type of returnIx says "you can achieve any postcondition which holds, just by doing nothing", which is the Hoare Logic rule for "skip".  The corresponding composition is the Hoare Logic rule for ";". 

Let's finish by looking at the type of bindIx , putting all the quantifiers in. 

bindIx :: forall i. m a i -> (forall j. a j -> m b j) -> m b i

These forall s have opposite polarity.  We choose initial state i , and a computation which can start at i , with postcondition a .  The world chooses any intermediate state j it likes, but it must give us the evidence that postcondition b holds, and from any such state, we can carry on to make b hold.  So, in sequence, we can achieve condition b from state i .  By releasing our grip on the "after" states, we can model unpredictable computations.