The Sub-optimality of the opportunistic approach to disinflation

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 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 non-linear effect of the shock on the position of Philips curve trade-off along with adaptive expectations yields an opportunistic inflation response. However, such nonlinear shift effects have no theoretical underpinning implying that the theory for opportunism is weak.