Sectoral Shocks and Monetary Policy in the United Kingdom

Huw Dixon, Jeremy Franklin and Stephen Millard

Oxford Bulletin of Economics and Statistics, 2023, vol. 85, issue 4, 805-829

Abstract: We examine the extent to which monetary policy should respond to movements in sectoral inflation rates using a Generalized Taylor model that takes specific account of the sectoral make‐up of the consumer price index. We calibrate the model for each sector using the UK consumer price microdata. We find that a policy rule allowing for different responses to inflation in different sectors outperforms a rule targeting only aggregate inflation, as does a rule responding only to core inflation. However, we find that the optimal sectoral rule only leads to a small absolute improvement in terms of extra consumption.

Date: 2023
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https://doi.org/10.1111/obes.12541

Related works:
Working Paper: Sectoral shocks and monetary policy in the United Kingdom (2021)
Working Paper: Sectoral shocks and monetary policy in the United Kingdom (2014)
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