Sectoral Shocks and Monetary Policy in the United Kingdom*

Abstract

We examine the extent to which monetary policy should respond to movements in sectoral inflation rates using a Generalized Taylor model that takes specific account of the sectoral make-up of the consumer price index. We calibrate the model for each sector using the UK consumer price microdata. We find that a policy rule allowing for different responses to inflation in different sectors outperforms a rule targeting only aggregate inflation, as does a rule responding only to core inflation. However, we find that the optimal sectoral rule only leads to a small absolute improvement in terms of extra consumption.