We derive optimal monetary policy in a sticky price model when private agents follow adaptive learning. We show that this slight departure from rationality has important implications for policy design. The central bank faces a new intertemporal trade-off, not present under rational expectations:...

Surveys of inflation forecasts show that expectations combine forward-looking and backward-looking elements. This contradicts conventional wisdom: In the presence of rational agents, adaptive agents would be driven out of the market. In our paper, we rationalize this finding in an equilibrium...