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The opportunistic approach to disinflation

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  • Athanasios Orphanides
  • David W. Wilcox

Abstract

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 Fed should not take deliberate anti-inflation action, but rather should wait for external circumstances-such as favorable supply shocks and unforeseen recessions-to deliver the desired reduction in inflation. While waiting for such circumstances to arise, the Fed should aggressively resist incipient increases in inflation. This strategy has come to be known as "the opportunistic approach to disinflation." We deduce policymaker 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 policymaker 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.

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File URL: http://www.federalreserve.gov/pubs/feds/1996/199624/199624abs.html
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File URL: http://www.federalreserve.gov/pubs/feds/1996/199624/199624pap.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-24.

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Date of creation: 1996
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Handle: RePEc:fip:fedgfe:96-24

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Related research

Keywords: Inflation (Finance);

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  1. 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.).
  2. 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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