Sectoral shocks and monetary policy in the United Kingdom

Huw Dixon, Jeremy Franklin and Stephen Millard

No 499, Bank of England working papers from Bank of England

Abstract: In this paper, we use an open economy model of the United Kingdom to examine the extent to which monetary policy should respond to movements in sectoral inflation rates. To do this we construct a Generalised Taylor model that takes specific account of the sectoral make up of the consumer price index (CPI), where the sectors are based on the COICOP classification the UK CPI microdata. We calibrate the model for each sector using the UK CPI microdata and model the sectoral shocks that drive sectoral inflation rates as white noise processes, as in the UK data. We find that a policy rule that allows for different responses to inflation in different sectors outperforms a rule which just targets aggregate CPI. However, the gain is small and comes from partially looking through movements in aggregate inflation driven by movements in petrol price inflation, which is volatile and tends not to reflect underlying inflationary pressure.

Keywords: CPI inflation; Sectoral inflation rates; Generalised Taylor economy (search for similar items in EconPapers)
JEL-codes: E17 E31 E52 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014-04-17
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Sectoral Shocks and Monetary Policy in the United Kingdom (2023)
Working Paper: Sectoral shocks and monetary policy in the United Kingdom (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0499

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