Working Paper: CEPR ID: DP3938
Authors: Patrick Minford; Naveen Srinivasan
Abstract: 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.
Keywords: deliberate disinflation; loss function; opportunistic disinflation
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| type of disinflation strategy (E31) | macroeconomic stability outcomes (E60) |
| opportunistic approach to disinflation is suboptimal under commitment (E61) | macroeconomic stability outcomes (E60) |
| response type (linear vs. nonlinear) (C32) | inflation outcomes (E31) |
| nature of expectations (D84) | effectiveness of the disinflation approach (E31) |