DP3938 Understanding the Opportunistic Approach to Disinflation

Author(s): Patrick Minford, Naveen Srinivasan
Publication Date: June 2003
Keyword(s): deliberate disinflation, loss function, opportunistic disinflation
JEL(s): E52, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3938

One approach to achieving price stability is to undertake a deliberate path to an ultimate goal of low inflation - deliberate disinflation. In contrast an opportunistic strategy for disinflation has gained credence in recent years. We compare the ability of the two approaches to achieve macroeconomic stability and conclude that the opportunistic approach is sub-optimal when a commitment mechanism is in place. We show that an opportunistic inflation response is, however, optimal when there is a non-linearity of the Phillips curve trade-off along with adaptive expectations- circumstances that appear unlikely in conditions of low inflation.