Jun 17, 2008

Ranking and policy reforms

Rigotnomics is the 255th most famous economics blog in the world. Not bad, but not good enough. I hope we can become more influential.

Now one of the cool things about econometrics is interaction terms that capture such things as how the effect of education on wage depends on skin colour, how the effect of natural resources on growth depends on corruption, how aid effectiveness depends on the rule of law etc...Now these can help you identify not only linear relationships, but also more complicated things.

In a new NBER working paper, Acemoglu and company show that the impact of Central Bank independance (CBI) on inflation depends on the constraints on the government (checks and balances). Not linearly, however. At low and high levels of constraints, there is no effect. It is only at intermediate levels of constraints that CBI reduces inflation.

So everytime you think something might explain something but depend on something else. Just divide that last something in many categories, make some dummies and interact them. Then, invent a story that fits with your statitical significances!


cosimo said...

That's what I am doing for my PhD paper. I hope I can also invent stories for the statistical insignificancies.

Sebastian said...

You are not the only one .... but seriously: It also makes sense. Why should the world be linear?