Medium-Run Effects of Central Bank Independence Reforms on Inflation and Income Inequality: Evidence from Panel Data and a New Keynesian Model

We examine the medium-run impacts of central bank independence (CBI) reforms on inflation, unemployment, and income inequality by combining panel event-study and local projection evidence with a small structural macroeconomic model. Using a panel of 30 countries from 1991–2019, we identify major CBI reform events and estimate their dynamic effects. The event-study shows no significant pre-trends in inequality and no detectable change in net income Gini following CBI reforms (Figure 1). Local projections confirm that while CBI reforms significantly reduce inflation by about 2 percentage points after 4–5 years, they have no statistically significant effect on unemployment or net income inequality. We then build a backward-looking New Keynesian model calibrated to high vs. low CBI regimes. The model reproduces the empirical inflation–unemployment dynamics and predicts only a negligible difference in inequality between high- and low-CBI scenarios (on the order of 0.03 Gini points). Our findings suggest that enhancing CBI delivers disinflation benefits without exacerbating income inequality in the medium run. We discuss robustness checks, policy implications for emerging and advanced economies, and the role of complementary policies.