DP2306 Revisiting the Case for a Populist Central Banker
It has been argued that the inflationary bias of discretionary monetary policy can be eliminated, and welfare maximized, by the appointment of a central banker who does not care at all about inflation (a 'populist central banker'). We show that this result hinges crucially on the assumption that wage bargaining occurs in terms of the real wage. When the strategic variable chosen by the unions is the nominal wage, the above result is true only in the special case of a single, all-encompassing, union. In the more general case of multiple unions, however, inflation increases linearly with their number and a populist central bank may turn out to be bad for welfare. The paper also shows that whether unions bargain their wages in nominal or in real terms influences the number of channels through which monetary policy can have systematic effects on real variables.