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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page A Quantitative Exploration of the Opportunistic Approach to Disinflation
Athanasios Orphanides, David H. Small, Volker Wieland, and David W. Wilcox

Abstract: A number of observers have advocated recently that the Federal Reserve take an ``opportunistic'' approach to the conduct of monetary policy. A hallmark of this approach is that the central bank focuses on fighting inflation when inflation is high, but focuses on stabilizing output when inflation is low. The implied policy rule is nonlinear. This paper compares the behavior of inflation and output under opportunistic and conventional linear policies. 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 steady-state distributions of inflation and output under the various rules.

Keywords: Inflation, monetary policy, interest rates, policy rules

Full paper (519 KB PDF) | Full paper (1052 KB Postscript)

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Last update: September 17, 1997