The Opportunistic Approach to Disinflation
AbstractThis 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.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal International Finance.
Volume (Year): 5 (2002)
Issue (Month): 1 (Spring)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1367-0271
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- Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2006.
"A quantitative exploration of the opportunistic approach to disinflation,"
Journal of Monetary Economics,
Elsevier, vol. 53(8), pages 1877-1893, November.
- Athanasios Orphanides & David H. Small & Volker Wieland & David W. Wilcox, 1997. "A quantitative exploration of the opportunistic approach to disinflation," Finance and Economics Discussion Series 1997-36, Board of Governors of the Federal Reserve System (U.S.).
- Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker, 2005. "A quantitative exploration of the opportunistic approach to disinflation," CFS Working Paper Series 2005/19, Center for Financial Studies (CFS).
- Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2003. "A Quantitative Exploration of the Opportunistic Approach to Disinflation," CEPR Discussion Papers 4073, C.E.P.R. Discussion Papers.
- Athanasios Orphanides & David W. Wilcox, 1996.
"The opportunistic approach to disinflation,"
Finance and Economics Discussion Series
96-24, Board of Governors of the Federal Reserve System (U.S.).
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