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, Ahmad Hassan Ahmad

Research output: Contribution to journalArticlepeer-review

2 Citations (SciVal)
166 Downloads (Pure)

Abstract

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 a 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.
Original languageEnglish
Pages (from-to)1063
Number of pages1082
JournalReview of Quantitative Finance and Accounting
Volume48
Issue number4
Early online date5 May 2016
DOIs
Publication statusPublished - May 2017

Fingerprint

Dive into the research topics of 'How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US'. Together they form a unique fingerprint.

Cite this