Working Paper: CEPR ID: DP2306
Authors: Francesco Lippi
Abstract: 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.
Keywords: monetary policy; games; central bank conservatism; wage-setting; nonatomism
JEL Codes: E50; J50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real wage bargaining (J52) | optimal inflation and employment outcomes (E31) |
| appointing a populist central banker (E59) | eliminates inflationary bias of monetary policy (E31) |
| populist central banker credible inflation threat (E59) | moderates wage demands (J38) |
| number of unions (J51) | equilibrium inflation increases (E31) |
| nominal wage bargaining (J31) | alters channels of monetary policy effects (E52) |
| nominal wage bargaining (J31) | populist central banker may not yield optimal welfare outcomes (E59) |
| nominal wage bargaining (J31) | restores conventional wisdom of central bank conservatism (E58) |
| conservative central bank (E58) | improves welfare under nominal wage bargaining (D69) |