Sectoral shocks and monetary policy in the United Kingdom

Huw Dixon, Jeremy Franklin and Stephen Millard

No E2021/10, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: In this paper, we 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). We calibrate the model for each sector using the UK CPI microdata. We find that a policy rule that allows for different responses to inflation in different sectors outperforms a rule which just targets aggregate CPI, as does a rule that responds only to non food and energy inflation. However, we find that the optimal sectoral rule only leads to a small absolute improvement in terms of extra consumption.

Keywords: CPI inflation; Sectoral inflation rates; Generalised Taylor economy; Financial Intermediation (search for similar items in EconPapers)
JEL-codes: E17 E31 E52 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2021-05
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-eec, nep-mac and nep-mon
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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 (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cdf:wpaper:2021/10

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