Sectoral shocks and monetary policy in the United Kingdom

Dixon, Huw ORCID: https://orcid.org/0000-0002-9875-8965, Franklin, Jeremy and Millard, Stephen 2023. Sectoral shocks and monetary policy in the United Kingdom. Oxford Bulletin of Economics and Statistics 85 (4) , pp. 805-829. 10.1111/obes.12541

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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.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HA Statistics H Social Sciences > HJ Public Finance
Publisher:	Wiley
ISSN:	0305-9049
Funders:	Bank of England
Date of First Compliant Deposit:	10 February 2023
Date of Acceptance:	3 January 2023
Last Modified:	10 Feb 2025 02:45
URI:	https://orca.cardiff.ac.uk/id/eprint/156375

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