Central bank independence, income inequality and poverty: What do the data say?

Abstract

This paper examines whether the independence of central banks is related to income inequality and poverty. Following the 2008 financial crisis, independent central banks have been criticized that their actions contribute to an unequal income distribution. Yet, the case can also be made that such independence is orthogonal to income inequality or can even help mitigate it. As proxies for inequality, we employ five-year averages of the Gini coefficient and the poverty gap. Our database consists of a large set of countries, covering a long period. Our fixed effects panel estimates suggest that—despite many claims to the contrary—there is neither a robust relationship between central bank independence and the Gini coefficient nor between independence and the poverty gap. Several robustness checks (using alternative proxies for income inequality and central bank independence, interaction effects, quantile and cross-section regressions) confirm our finding.