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Title: How important is the financial sector to price indices in an inflation targeting regime? An empirical analysis of the UK and the US
Authors: Shah, Imran Hussain
Ahmad, A.H.
Keywords: Stock prices
Output stability index
Inflation targeting
Fundamental
Bubbles
Issue Date: 2016
Publisher: © Springer
Citation: SHAH, I.H. and AHMED, A.H., 2016. 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.
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 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.
Description: The final publication is available at Springer via http://dx.doi.org/10.1007/s11156-016-0578-9.
Version: Accepted for publication
DOI: 10.1007/s11156-016-0578-9
URI: https://dspace.lboro.ac.uk/2134/21219
Publisher Link: http:/dx.doi.org/10.1007/s11156-016-0578-9
ISSN: 0924-865X
Appears in Collections:Published Articles (Economics)

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