MNI: Independent CenBanks Reduce Inequality - BCB Advisor

An independent central bank reduces the negative impacts of inflation on income inequality and poverty, Central Bank of Brazil advisor Bruno Pires Tiberto told MNI after authoring a paper on the issue, adding that a proposed new legislative change could raise the BCB’s level of autonomy to among the highest in the world.

When central bank independence is zero on a scale of 0 to 1, a 10% inflationary shock decreases the share of total income of the poorest sectors of the population and increases that of the highest, according to the study of 46 central banks from 1980 to 2022 published in February. But when the degree of independence is at least 0.4 on the scale the adverse effects of inflation are fully mitigated for the poorest 10% of the population, while when independence is total the positive distributional effects are even more pronounced.

"In addition to inflation and the central bank independence index, the model incorporates key variables identified in the literature as determinants of income inequality and poverty, such as GDP growth, trade openness, unemployment rate, and government spending," Tiberto said in an interview, emphasizing that the results of his work reflect only his own views as a researcher and do not necessarily represent those of the central bank.

"The advanced economies in the study sample had an average central bank independence score of 0.71 over the period from 1980 to 2022, while for emerging and developing economies, this value was 0.63,” said Tiberto.

BOOSTING BCB INDEPENDENCE

The BCB’s average independence score over the 1980–2022 period was 0.32, but this rose from 0.16 between 1980 and 1989 to 0.35 between 2010 and 2019. Since 2021, when the central bank’s independence was formalized in a law, the autonomy score has stood at 0.64, very close to the global average of 0.68, which is a level sufficient to increase the income share of the poorest 80% of the population during an inflationary shock, according to the study.

"The BCB’s degree of autonomy has increased over time,” said Tiberto, adding that a proposed amendment to the autonomy law now in Congress would further raise the Brazilian central bank's independence toward the highest levels.

"This amendment aims to further strengthen the BCB’s autonomy by granting it financial, budgetary, and administrative independence,” he said. "If approved, this amendment could raise the BCB’s autonomy score to 0.87, placing it on par with the world’s leading central banks. The average autonomy score for European Union countries is 0.87, while for advanced economies, it is 0.75." 

While the study’s findings might imply that the increased autonomy granted to the BCB in 2021 is likely to have a beneficial impact on poverty and income inequality by strengthening price stability, Tiberto cautioned that it was not predictive.

"Since the study does not evaluate individual countries or make projections, these inferences should be considered with caution regarding their ability to provide quantitatively verifiable predictions," he said.

Nor does the study not explore differences between advanced and emerging economies.

"However, this is a possible approach for a future version and could provide interesting insights," Tiberto said. (See MNI WATCH: BCB To Slow Hiking Pace, Magnitude Still Uncertain)