Working Paper: CEPR ID: DP3106
Authors: Hans Peter Grüner
Abstract: Capital market theory predicts that the wealth distribution should affect interest rates. This Paper empirically analyses the relationship between the wealth distribution and interest rates in the US. We use data on wealth inequality from various sources. Measures of wealth inequality are linked positively to the real commercial paper rate and to the real rate on government securities. This result is consistent with predictions from capital market equilibrium models with moral hazard. Accordingly, rich individuals can only commit credibly 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.
Keywords: interest rates; wealth distribution
JEL Codes: E20; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wealth inequality (D31) | real commercial paper rates (E43) |
| wealth inequality (D31) | real rates on government securities (E43) |
| decrease in wealth inequality (D31) | decrease in required rate of return (G19) |
| decrease in required rate of return (G19) | lower equilibrium rate of return (D50) |