DP3938 | Understanding the Opportunistic Approach to Disinflation

Publication Date

23/06/2003

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Abstract

One approach to achieving price stability is to undertake a deliberate path to an ultimate goal of low inflation - deliberate disinflation. In contrast an opportunistic strategy for disinflation has gained credence in recent years. We compare the ability of the two approaches to achieve macroeconomic stability and conclude that the opportunistic approach is sub-optimal when a commitment mechanism is in place. We show that an opportunistic inflation response is, however, optimal when there is a non-linearity of the Phillips curve trade-off along with adaptive expectations- circumstances that appear unlikely in conditions of low inflation.