Does Central Bank Independence Increase Inequality?
Since the 1980s, income inequality has increased substantially in several countries. Yet the political logic that triggered rising inequality in some places but not in others remains poorly understood. This paper builds a theory that links central...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/422091611242015974/Does-Central-Bank-Independence-Increase-Inequality http://hdl.handle.net/10986/35069 |
| Summary: | Since the 1980s, income inequality has
increased substantially in several countries. Yet the
political logic that triggered rising inequality in some
places but not in others remains poorly understood. This
paper builds a theory that links central bank independence
to these dynamics. It posits the existence of three
mechanisms that tie central bank independence to inequality.
First, central bank independence indirectly constrains
fiscal policy and weakens a government's ability to
engage in redistribution. Second, central bank independence
incentivizes governments to deregulate financial markets,
which generates a boom in asset values. These assets are
predominantly in the hands of wealthier segments of the
population. Third, to contain inflationary pressures,
governments actively promote policies that weaken the
bargaining power of workers. Together, these policies
strengthen secular trends towards higher inequality
according to standard indicators. Empirically, the analysis
finds a strong relation between central bank independence
and inequality, as well as support for each of the
mechanisms. From a policy perspective, our findings
contribute to knowledge on the undesirable side effects of
central bank independence. |
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