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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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    References listed on IDEAS

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    Cited by:

    1. 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.
    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. 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.

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    Keywords

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    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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