Trust Us to Repay: Social Trust, Long-Term Interest Rates and Sovereign Credit Rating
36 Pages Posted: 15 Jan 2015
Date Written: November 1, 2014
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.
Keywords: Trust, credit ratings, interest rates, economic reforms
JEL Classification: G12, A13
Suggested Citation: Suggested Citation