How Does Central Bank Independence Influence the Relationship Between Inflation, Income Inequality and Poverty?

Bruno Tiberto

No 615, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This study employs panel data analysis for 46 countries from 1980 to 2022 to investigate the impact of inflation on income inequality and poverty, highlighting the mitigating role of central bank independence. Using a comprehensive index of de jure central bank independence, the study assesses its influence on five measures of income inequality, four measures of poverty, and income deciles. The findings suggest structural factors are the main drivers of income inequality and poverty, rather than central bank independence. However, while inflation worsens these issues, central bank independence can counteract the adverse effects of inflation. Moreover, the evidence indicates greater central bank independence disproportionately benefits low-income households at the expense of high-income households, with these redistributive effects being more pronounced at higher levels of independence. In conclusion, central bank independence is pivotal in alleviating the negative impacts of inflationary shocks on income inequality and poverty, thereby promoting social and economic justice.

Date: 2025-02
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