The Opportunistic Approach to Disinflation

Posted: 16 Apr 1998

See all articles by Athanasios Orphanides

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management

David W. Wilcox

Federal Reserve Board - Division of Research and Statistics

Date Written: May 1996

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.

JEL Classification: E52

Suggested Citation

Orphanides, Athanasios and Wilcox, David W., The Opportunistic Approach to Disinflation (May 1996). FEDS Working Paper No. 96-24. Available at SSRN: https://ssrn.com/abstract=3280

Athanasios Orphanides (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

David W. Wilcox

Federal Reserve Board - Division of Research and Statistics ( email )

20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States

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