Francesco Lippi (2002) has insightfully discovered a mistake in the analysis of our earlier paper. Correcting that mistake adds complexity and richness to the analysis, and qualifies some of our results. It does not, however, invalidate the general thrust of the analysis. In Guzzo and Velasco (1999), we argued that if wage setters are nonatomistic and they dislike inflation, several tenets of the conventional wisdom on the benefits of "conservative" central bankers need not hold. In particular, we showed that: (a) A more conservative central bank (CB)can yield lower employment and output in equilibrium. (b) Inflation can be hump-shaped in the degree of central bank conservativeness (CBC), with intermediate CBC yielding the highest levels of inflation. (c) A populist central banker who does not care at all about inflation can maximize the welfare of the representative worker by delivering low inflation and a first-best level of output.
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