DP4073 | A Quantitative Exploration of the Opportunistic Approach to Disinflation

Publication Date

23/09/2003

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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.