Wealth Inequality and Credit Markets: Evidence from Three Industrialized Countries

35 Pages Posted: 2 Jun 2008

See all articles by Markus Bruckner

Markus Bruckner

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Kerstin Gerling

International Monetary Fund (IMF)

H. P. Gruner

University of Mannheim - Department of Economics; Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)

Date Written: September 2007

Abstract

Capital market theory predicts that the wealth distribution of an economy affects real interest rates. This paper empirically analyzes this relationship for the US, the UK and Sweden. We obtain that measures of wealth inequality are positively linked to the real rate on government securities in all three countries. This result is consistent with predictions from capital market equilibrium models with moral hazard such as Aghion and Bolton (1997) or Piketty (1997). Accordingly, rich individuals can only credibly commit to providing effort if the rate of return is not too high. When the rich are poorer, the rate of return has to be lower in order to guarantee entrepreneurial effort. Capital demand will therefore fall as inequality is reduced. The capital market is in equilibrium at a lower rate of return. The results bear important implications for economic growth and distributive policies.

Keywords: interest rates, wealth distribution

JEL Classification: E20, E62

Suggested Citation

Bruckner, Markus and Gerling, Kerstin and Grüner, Hans Peter, Wealth Inequality and Credit Markets: Evidence from Three Industrialized Countries (September 2007). CEPR Discussion Paper No. DP6485, Available at SSRN: https://ssrn.com/abstract=1138949

Markus Bruckner

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Kerstin Gerling

International Monetary Fund (IMF) ( email )

Hans Peter Grüner (Contact Author)

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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