Revisiting the case for a populist central banker

It is known that discretionary policy may give rise to an inflationary bias if wages are negotiated in nominal terms. In a recent issue of this Review, Guzzo and Velasco argued that this bias 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), A conceptual flaw, of the latter result is identified here, It is shown that when wages are negotiated in nominal terms the 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 hank may turn out to decrease welfare. (C) 2002 Elsevier Science B.V. All rights reserved.