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
Subjects:	Other economics not elsewhere classified Stock prices Output stability index Inflation targeting Fundamental Bubbles Economics not elsewhere classified
Online Access:	https://hdl.handle.net/2134/21219
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id	rr-article-9494177
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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_	1797374644749074432

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

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