Faculty of Economics and Business Administration Publications Database

A Quantitative Exploration of the Opportunistic Approach to Disinflation

Aksoy, Yunus
Orphanides, Athanasios
Small, David
Wilcox, David
Volume: 53
Number: 8
Pages: 1877 - 1893
Month: November
ISSN-Print: 0304-3932
Link External Source: Online Version
Year: 2006
Keywords: Inflation targeting; Monetary policy; Interest rates; Policy rules; Disinflation
Abstract: Under a conventional policy rule, a central bank adjusts its policy rate linearly according to the gap between inflation and its target, and the gap between output and its potential. Under “the opportunistic approach to disinflation” a central bank controls inflation aggressively when inflation is far from its target, but concentrates more on output stabilization when inflation is close to its target, allowing supply shocks and unforeseen fluctuations in aggregate demand to move inflation within a certain band. We use stochastic simulations of a small-scale rational expectations model to contrast the behavior of output and inflation under opportunistic and linear rules.