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Sectoral Shocks and Monetary Policy in the United Kingdom

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  • Huw Dixon
  • Jeremy Franklin
  • Stephen Millard

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.

Suggested Citation

  • Huw Dixon & Jeremy Franklin & Stephen Millard, 2023. "Sectoral Shocks and Monetary Policy in the United Kingdom," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(4), pages 805-829, August.
    • Handle: RePEc:bla:obuest:v:85:y:2023:i:4:p:805-829
    DOI: 10.1111/obes.12541
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    References listed on IDEAS

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