This paper asks whether the sensitivity of market long-term interest rates and credit ratings is associated with cross-country differences in informal institutions, measured by social trust. We note a number of theoretical mechanisms that could imply that similar objective problems are more likely to be effectively dealt with in higher-trust societies. A set of panel estimates across middle and high-income countries reveal that interest rates and ratings are substantially more sensitive to inflation and growth problems in low-trust countries. This finding sheds light on the differential market reactions to economic problems in seemingly comparable countries.
Journal of Money, Credit and Banking
Trust Us to Repay: Social Trust, Long-Term Interest Rates, and Sovereign Credit Ratings
Journal Article
Reference
Bergh, Andreas and Christian Bjørnskov (2021). “Trust Us to Repay: Social Trust, Long-Term Interest Rates, and Sovereign Credit Ratings”. Journal of Money, Credit and Banking 53(5), 1151–1174. doi.org/10.1111/jmcb.12812
Bergh, Andreas and Christian Bjørnskov (2021). “Trust Us to Repay: Social Trust, Long-Term Interest Rates, and Sovereign Credit Ratings”. Journal of Money, Credit and Banking 53(5), 1151–1174. doi.org/10.1111/jmcb.12812
Authors
Andreas Bergh, Christian Bjørnskov