The Opportunistic Approach to Disinflation

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.