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Sectoral shocks and monetary policy in the United Kingdom

Author

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  • Dixon, Huw

    (Cardiff Business School)

  • Franklin, Jeremy

    (Bank of England)

  • Millard, Stephen

    (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.

Suggested Citation

  • Dixon, Huw & Franklin, Jeremy & Millard, Stephen, 2014. "Sectoral shocks and monetary policy in the United Kingdom," Bank of England working papers 499, Bank of England.
    • Handle: RePEc:boe:boeewp:0499
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    References listed on IDEAS

    as
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    Cited by:

    1. Frank Smets & Joris Tielens & Jan Van Hove, 2018. "Pipeline Pressures and Sectoral Inflation Dynamics," Working Paper Research 351, National Bank of Belgium.
    2. Aminu, Nasir, 2019. "Energy prices volatility and the United Kingdom: Evidence from a dynamic stochastic general equilibrium model," Energy, Elsevier, vol. 172(C), pages 487-497.
    3. Dixon, Huw & Seaton, Johathan S. & Waterson, Michael, 2014. "Price Flexibility In British Supermarkets: Moderation And Recession," Economic Research Papers 270246, University of Warwick - Department of Economics.

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    More about this item

    Keywords

    CPI inflation; Sectoral inflation rates; Generalised Taylor economy;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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