Document Type

Article

Publication Date

9-2013

Publication Title

Journal of Economic Dynamics and Control

Abstract

This paper explores the impact of monetary policy regime change on sectoral and regional inflation by analyzing the case of Canada and its adoption of inflation targeting (IT). Using disaggregated CPI data for Canada from 1978, we find that responses to the change in the monetary policy framework are quite heterogeneous, particularly across sectors. While inflation series in the traditionally volatile commodity sectors exhibit weak responses to the regime change, those in the so-called core sectors are highly responsive. This pattern is evident in both national and provincial level data, indicating that it is the core sectors that are crucial for the transmission of a monetary policy regime change. Further analysis based on a common factor model reveals that common shocks, such as those associated with the monetary policy framework, account for only a small portion of the variation in sectoral inflation, and that their relative importance has decreased after IT adoption in many core sectors. Interestingly, considerable variation exists even across the core sectors in the strength of the regime change effect. We document that this heterogeneity is meaningfully correlated with some measurable sector-specific characteristics; sectors with a lower degree of prices stickiness and a lower degree of tradability appear more sensitive to the change in monetary policy regime.

Keywords

Monetary policy regime, Inflation Targeting (IT), Heterogeneity, Sectoral inflation, Structural change, Persistence, Factor model analysis, Canadian provinces

Volume

37

Issue

9

First Page

1814

Last Page

1832

DOI

doi.org/10.1016/j.jedc.2013.04.001

Rights

© the authors

Comments

Author’s submitted manuscript.

Included in

Economics Commons

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