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World Interest Rates, Inequality and Growth: an Empirical Analysis of the Galor-Zeira Model

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  • Michele Battisti
  • Tamara Fioroni
  • Andrea Mario Lavezzi

Abstract

Following Galor and Zeira (1993), we study the effect of the world interest rate on inequality and growth for the period 1985-2005, char- acterized by falling world interest rates and cross-country income po- larization. We argue that the two phenomena are related on the basis of the following findings, which are in accordance with the predictions of the Galor and Zeira model: 1) a reduction of the world interest rates increases inequality in rich countries and decreases inequality in poor countries; 2) inequality has a negative (and significant) effect on hu- man capital accumulation in rich countries and a positive (but mostly not significant) effect in poor countries; 3) human capital positively affects GDP in both group of countries, in particular with a higher marginal effect in poor countries. The overall effect of these facts is polarization in the world income distribution.

Suggested Citation

  • Michele Battisti & Tamara Fioroni & Andrea Mario Lavezzi, 2014. "World Interest Rates, Inequality and Growth: an Empirical Analysis of the Galor-Zeira Model," Discussion Papers 2014/184, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    • Handle: RePEc:pie:dsedps:2014/184
    Note: ISSN 2039-1854
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    File URL: https://www.ec.unipi.it/documents/Ricerca/papers/2014-184.pdf
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    References listed on IDEAS

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    4. Atkinson, A B, 1997. "Bringing Income Distribution in from the Cold," Economic Journal, Royal Economic Society, vol. 107(441), pages 297-321, March.
    5. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    6. Battisti, Michele & Parmeter, Christopher F., 2013. "Clustering and polarization in the distribution of output: A multivariate perspective," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 144-162.
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    9. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    10. Rudiger Ahrend & Pietro Catte & Robert Price, 2006. "Factors Behind Low Long-Term Interest Rates," OECD Economics Department Working Papers 490, OECD Publishing.
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    Cited by:

    1. Deniz Sevinc & Edgar Mata Flores & Simon Collinson, 2020. "Are there inequality spillovers? Evidence through a modified inequality measure and European dynamics of inequality," Working Papers 545, ECINEQ, Society for the Study of Economic Inequality.
    2. Jakub Bartak, 2017. "Does income inequality hamper human capital accumulation in OECD countries?," Managerial Economics, AGH University of Science and Technology, Faculty of Management, vol. 18(2), pages 133-145.
    3. Bartak Jakub & Jabłoński Łukasz, 2016. "Human Capital Versus Income Variations: Are They Linked in OECD Countries?," Journal of Management and Business Administration. Central Europe, Sciendo, vol. 24(2), pages 56-73, June.

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    More about this item

    Keywords

    Inequality; Human Capital; Economic Growth; Multiple Equilibria; World Interest Rates.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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