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A quantitative exploration of the opportunistic approach to disinflation |
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| Authors: | Yunus Aksoy David Small David Wilcox |
| Institution: | a School of Economics, Mathematics and Statistics, Birkbeck College, University of London, London, WC1E 7HX, UK b Board of Governors of the Federal Reserve System, Washington, DC 20551, USA c Department of Economics, Goethe University of Frankfurt, Mertonstrasse 17, D-60054 Frankfurt am Main, Germany d CEPR, 90-98 Goswell Road, London EC1V 7RR, UK e Center for Financial Studies, Mertonstrasse 17, D-60054 Frankfurt am Main, Germany |
| 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. |
| Keywords: | E31 E52 E58 E61 |
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