Dec 6, 2011
Wouldn't it be nice (to have a bit more inflation)?
Central bankers have in their hands policy tools that allow them to optimize society‟s wellbeing. This paper argues that the latter is best captured by the quality of music and then provides estimates based on a reduced-form non-linear smoother as well as a quadratic fit that suggest the Federal Reserve should aim for a rate around 6.2%, way above the holy-grail target of 2%.
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7 comments:
What's the target for the ECB? Maybe there is some scope for the ECB buy European sovereign debt after all?
Camerone
UK inflation has been hovering close to 5% for a while now.
But somehow I do not see a comeback of stars that are similar to those of the 'Golden Era of Rock' in the 1970s.
If anything with shows like Xfactor, the quality of music is getting worse not better ?
Hi Tomasz! That is because the optimal inflation in the UK is 13.7%, much higher than in the US! Check UK version of the figure in the paper!
Also in the paper, using the IMF forecast, I had indeed predicted the Great Music collapse in the UK!
I read your paper a bit better now.
I still think that it is quite interesting, but I think that there are a couple of caveats (you will have certainly heard those before).
1) Is your finding subject to the Lucas critique? You argue that high inflation may drive talented individual towards other sectors, which may yield higher income, but certainly, the rents from being a musicians must have decreased with the advent of Napster, etc...
Futhermore, in both the UK and the US, the finnacial system has substantially more deregulated over time since the 1980s. this has increased the wages received in the financial sector with respect other sectors tremendously ( see the paper by Reshef and Phillipon on this). So even with high inflation, the rents in the financial sector would still be higher than in other sectors.
Because of these two structural breaks, I think , it is difficult to make forecasts based on your reduced form estimates, since we are in a new regime now.
2) Is there an omitted variable bias problem here? What strikes me is that basaically you are picking up periods of stag flation in your regression. Have you checked if your results still hold when you include unemployment or the change in unemployment?
3) So my line would be: You have an interesting correlation. But even then it is unclear how robust it is to other macro factors, i.e. omitted variable bias.
Apologies for this long luinch time rant, but this former central banker certainly is very averse to inflation :)
Hihihi I wished the referees wd've come with some this interesting...
to answer the easy question first, yes it is robust to controlling for unemployment (though not shown in paper). Actually the original aim was to find an association of good music and high unemployment. Instead I found music to be best in high growth and high inflation (tho not too high) environments...
but when I wrote this paper I was trying to be funny rather than robust... but I realize now that I could actually show something quite robust here...
as for the mechanisms and the allocation of talent I didn't think too much about it but I get I cd come out with a better story!
so u shifted to LBS now?
pl
Yes I am at LBS now, but will be back at boe at the end of april. I saw that you are at Oxford now. CONGRATS. VERY WELL DONE.
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