A Quantitative Exploration of the Opportunistic Approach to Disinflation

29 Pages Posted: 20 Nov 2003

See all articles by Yunus Aksoy

Yunus Aksoy

Birkbeck, University of London

Athanasios Orphanides

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

David H. Small

Federal Reserve Board - Monetary Studies Section

David W. Wilcox

Federal Reserve Board - Division of Research and Statistics

Volker Wieland

University of Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: September 2003

Abstract

This Paper explores the quantitative implications of an approach to monetary policy that gained prominence in the United States during the 1990s. Proponents of this approach recommend that, when inflation is moderate but still above the long-run objective, the central bank should not move immediately to fight inflation, but rather wait for exogenous circumstances - such as favourable supply shocks and unforeseen recessions - to deliver the desired reduction in inflation. While waiting for such circumstances the central bank should counteract any incipient increases in inflation. This approach has come to be known as 'the opportunistic approach to disinflation'. The implied policy rule is non-linear and path-dependent. This Paper compares the behaviour of inflation and output under opportunistic and conventional linear policy. 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 stochastic steady-state distributions of inflation and output under opportunistic versus linear policy rules.

Keywords: Inflation targeting, monetary policy, interest rates, policy rules, disinflation

JEL Classification: E31, E52, E58, E61

Suggested Citation

Aksoy, Yunus and Orphanides, Athanasios and Small, David H. and Wilcox, David W. and Wieland, Volker, A Quantitative Exploration of the Opportunistic Approach to Disinflation (September 2003). CEPR Discussion Paper No. 4073. Available at SSRN: https://ssrn.com/abstract=471360

Yunus Aksoy (Contact Author)

Birkbeck, University of London ( email )

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Athanasios Orphanides

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

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David H. Small

Federal Reserve Board - Monetary Studies Section ( email )

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David W. Wilcox

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

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Volker Wieland

University of Frankfurt ( email )

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Germany
+49 69 798 33805 (Phone)
+49 69 798 33907 (Fax)

HOME PAGE: http://www.volkerwieland.com

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