Price level targeting and adaptive learning

This paper examines the implications of adaptive learning in the New Keynesian benchmark model extended with inflation indexation to capture inflation persistence. First, we show that the price level will be stationary and follow an AR(2) process. Next, we study under which circumstances the rational expectations equilibrium will be learnable. Finally, we examine the implications of constant gain learning for the average value of the central bank loss function. Our main finding is that the optimal rule under commitment turns out to be very robust, delivering good performance under constant gains learning