This paper explores the theoretical foundations of a new approach to monetary policy. Proponents of this approach hold that, when inflation is moderate but still above the long-run objective, the central bank should not take deliberate anti-inflation action but, rather, should wait for exogenous circumstances--such as favourable supply shocks and unforeseen recessions--to deliver the desired reduction in inflation. While waiting for such circumstances to arise, the central bank should aggressively resist incipient increases in inflation. This strategy has come to be known as "the opportunistic approach to disinflation". We deduce policy maker preferences that rationalize the opportunistic approach as the optimal strategy for disinflation in the context of a model that is standard in other respects. The policy maker who is endowed with these preferences tends to focus on stabilizing output when inflation is low, but on fighting inflation when inflation is high. We contrast the opportunistic approach to a more conventional strategy derived from strictly quadratic preferences. Copyright 2002 by Blackwell Publishers Ltd.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.