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Price level targeting and adaptive learning

Author

Listed:
  • Vitor Gaspar

    (David Vestin)

Abstract

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

Suggested Citation

  • Vitor Gaspar, 2006. "Price level targeting and adaptive learning," Computing in Economics and Finance 2006 195, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:195
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    Cited by:

    1. Orphanides, Athanasios & Williams, John C., 2008. "Learning, expectations formation, and the pitfalls of optimal control monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 80-96, October.
    2. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series,in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076 Central Bank of Chile.
    3. Maritta Paloviita, 2008. "Comparing alternative Phillips curve specifications: European results with survey-based expectations," Applied Economics, Taylor & Francis Journals, vol. 40(17), pages 2259-2270.

    More about this item

    Keywords

    Adaptive learningn; price level targeting;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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