Abstract: This paper explores the theoretical foundations of a
new approach to monetary policy. Proponents of this approach hold
that when inflation is moderate but still above the long-run
objective, the Fed should not take deliberate anti-inflation action,
but rather should wait for external circumstances-such as favorable
supply shocks and unforeseen recessions-to deliver the desired
reduction in inflation. While waiting for such circumstances to
arise, the Fed should aggressively resist incipient increases in
inflation. This strategy has come to be known as "the opportunistic
approach to disinflation." We deduce policymaker preferences that
rationalize the opportunistic approach as the optimal strategy for
disinflation in the context of a model that is standard in other
respects. The policymaker who is endowed with these preferences tends
to focus on stabilizing output when inflation is low, but on fighting
inflation when inflation is high. We contrast the opportunistic
approach to amore conventional strategy derived from strictly
quadratic preferences.
Keywords: Inflation, monetary policy, interest rates, policy rules
Full paper (331 KB PDF)
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