Does Central Bank Independence Promote Inequality?

• In Event: Credit Cycles, Inequality and Populism

Abstract

Over the last 30 years, income inequality increased substantially in many industrialized
countries (Piketty and Saez, 2014; Milanovic, 2016). We build a theory that links central bank independence (CBI) to these income dynamics. We posit the existence of three mechanisms. First, CBI indirectly constrains fiscal policy and weakens a government’s ability to engage in redistribution. Second, CBI coupled with deregulation 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 toward higher inequality. Using new data, we find a strong relation between CBI and income inequality, as well as support for each of the mechanisms. From a policy perspective, our findings add to the voices expressing concerns over the side-effects of CBI.

Authors

• Michael Aklin, University of Pittsburgh

• Andreas Kern, Georgetown University

• Mario Negre, German Development Institute (DIE/GDI)