How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US

This paper investigates whether there are benefits in terms of higher economic stability from incorporating stock prices into the price index targeted by the central banks. It also looks into the question of whether central banks should use stock prices as a component of the output stability index a...

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Main Authors: Imran Hussain Shah, Ahmad Hassan Ahmad
Format: Default Article
Published: 2016
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Online Access:https://hdl.handle.net/2134/21219
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spelling rr-article-94941772016-05-05T00:00:00Z How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US Imran Hussain Shah (5233517) Ahmad Hassan Ahmad (1249758) Other economics not elsewhere classified Stock prices Output stability index Inflation targeting Fundamental Bubbles Economics not elsewhere classified This paper investigates whether there are benefits in terms of higher economic stability from incorporating stock prices into the price index targeted by the central banks. It also looks into the question of whether central banks should use stock prices as a component of the output stability index and how the index can be constructed. An optimization technique is employed to estimate weights for the various sectoral prices. The obtained weights, which depend on sectoral parameters, differ from those used in the construction of the consumer price index, CPI. Using data from the UK and the US, our analysis demonstrates that in comparison to the CPI, our measure of inflation leads to higher output stability. Thus, in an inflation-targeting monetary policy environment, it is important to adopt a broader inflation benchmark than the CPI for the general macroeconomic stability. 2016-05-05T00:00:00Z Text Journal contribution 2134/21219 https://figshare.com/articles/journal_contribution/How_important_is_the_financial_sector_to_price_indices_in_an_inflation_targeting_regime_An_empirical_analysis_of_the_UK_and_the_US/9494177 CC BY-NC-ND 4.0
institution Loughborough University
collection Figshare
topic Other economics not elsewhere classified
Stock prices
Output stability index
Inflation targeting
Fundamental
Bubbles
Economics not elsewhere classified
spellingShingle Other economics not elsewhere classified
Stock prices
Output stability index
Inflation targeting
Fundamental
Bubbles
Economics not elsewhere classified
Imran Hussain Shah
Ahmad Hassan Ahmad
How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US
description This paper investigates whether there are benefits in terms of higher economic stability from incorporating stock prices into the price index targeted by the central banks. It also looks into the question of whether central banks should use stock prices as a component of the output stability index and how the index can be constructed. An optimization technique is employed to estimate weights for the various sectoral prices. The obtained weights, which depend on sectoral parameters, differ from those used in the construction of the consumer price index, CPI. Using data from the UK and the US, our analysis demonstrates that in comparison to the CPI, our measure of inflation leads to higher output stability. Thus, in an inflation-targeting monetary policy environment, it is important to adopt a broader inflation benchmark than the CPI for the general macroeconomic stability.
format Default
Article
author Imran Hussain Shah
Ahmad Hassan Ahmad
author_facet Imran Hussain Shah
Ahmad Hassan Ahmad
author_sort Imran Hussain Shah (5233517)
title How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US
title_short How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US
title_full How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US
title_fullStr How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US
title_full_unstemmed How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US
title_sort how important is the financial sector to price indices in an inflation targeting regime? an empirical analysis of the uk and the us
publishDate 2016
url https://hdl.handle.net/2134/21219
_version_ 1757055094235332608