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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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journal contribution
posted on 2016-05-13, 10:10 authored by Imran Hussain Shah, Ahmad Hassan AhmadAhmad Hassan Ahmad
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.

History

School

  • Business and Economics

Department

  • Economics

Published in

Review of Quantitative Finance and Accounting

Volume

48

Issue

4

Pages

1063 - 1082

Citation

SHAH, I.H. and AHMED, A.H., 2017. How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US. Review of Quantitative Finance and Accounting, 48 (4), pp. 1063–1082.

Publisher

© Springer

Version

  • AM (Accepted Manuscript)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Acceptance date

2016-04-24

Publication date

2016-05-05

Notes

The final publication is available at Springer via http://dx.doi.org/10.1007/s11156-016-0578-9.

ISSN

0924-865X

eISSN

1573-7179

Language

  • en

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