| By: |
Yunus Aksoy (School of Economics, Mathematics and Statistics, Birkbeck College, University of London);
Athanasios Orphanides (Board of Governors of the Federal Reserve System, Washington);
David Small (Board of Governors of the Federal Reserve System, Washington);
Volker Wieland (Goethe University of Frankfurt, CEPR, and Center for Financial Studies);
David Wilcox (Board of Governors of the Federal Reserve System, Washington) |
| 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: |
Inflation targeting, monetary policy, interest rates, policy rules, disinflation |
| JEL: |
E31 E52 E58 E61 |
| Date: |
2005–01–19 |
| URL: |
http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200519&r=cmp |