How is Central Bank Independence Shaping Income Inequality in Developing Countries?

Amid growing global concern over increasing income inequality, the role of monetary policy and the central bank have come under increased scrutiny. This study employed a dynamic panel data analysis, drawing upon data from the World Bank's PovcalNet and the World Development Indicators for 25 countries from 2000 to 2018. The research explored the effects of central bank independence on income distribution. The analysis revealed that central bank independence plays a crucial role in controlling inflation, which, in turn, contributes to lowering income inequality. However, the findings also highlighted that while central bank independence fosters financial stability and controls inflation, it tends to weaken the effectiveness of fiscal policy, potentially exacerbating income disparities. Additionally, it is observed that central bank independence is associated with greater financial openness, which can lead to increased asset prices and further widen the income inequality gap. This research offers a nuanced understanding of the trade-offs entailed in central bank policies and their extensive socioeconomic ramifications, thereby contributing a novel perspective to the discourse on monetary policy and income inequality.