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A quantitative exploration of the opportunistic approach to disinflation

  • Athanasios Orphanides
  • David H. Small
  • Volker Wieland
  • David W. Wilcox

A number of observers have advocated recently that the Federal Reserve take an ``opportunistic'' approach to the conduct of monetary policy. A hallmark of this approach is that the central bank focuses on fighting inflation when inflation is high, but focuses on stabilizing output when inflation is low. The implied policy rule is nonlinear. This paper compares the behavior of inflation and output under opportunistic and conventional linear policies. Using stochastic simulations of a small-scale rational expectations model, we study the cost and time required to achieve a given disinflation, as well as the steady-state distributions of inflation and output under the various rules.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1997-36.

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Date of creation: 1997
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Handle: RePEc:fip:fedgfe:1997-36
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  1. Fuhrer, Jeffrey C., 1997. "Towards a compact, empirically-verified rational expectations model for monetary policy analysis," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 197-230, December.
  2. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
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  8. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  9. Athanasios Orphanides & Volker Wieland, 1998. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Finance and Economics Discussion Series 1998-35, Board of Governors of the Federal Reserve System (U.S.).
  10. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of simple monetary policy rules under model uncertainty," Finance and Economics Discussion Series 1998-45, Board of Governors of the Federal Reserve System (U.S.).
  11. Arturo Extrella & Jeffrey C. Fuhrer, 1998. "Dynamic inconsistencies: counterfactual implications of a class of rational expectations models," Working Papers 98-5, Federal Reserve Bank of Boston.
  12. Boucekkine, Raouf, 1995. "An alternative methodology for solving nonlinear forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 711-734, May.
  13. Orphanides, Athanasios & Wilcox, David W, 2002. "The Opportunistic Approach to Disinflation," International Finance, Wiley Blackwell, vol. 5(1), pages 47-71, Spring.
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