Trust Us to Repay: Social Trust, Long-Term Interest Rates and Sovereign Credit Rating

36 Pages Posted: 15 Jan 2015

See all articles by Andreas Bergh

Andreas Bergh

Research Institute of Industrial Economics (IFN); Lund University - Department of Economics

Christian Bjørnskov

Aarhus University - Department of Economics and Business; Research Institute of Industrial Economics (IFN); Center for Political Studies; Institute for Corruption Studies

Date Written: November 1, 2014

Abstract

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

Bergh, Andreas and Bjørnskov, Christian, Trust Us to Repay: Social Trust, Long-Term Interest Rates and Sovereign Credit Rating (November 1, 2014). IFN Working Paper No. 1039, Available at SSRN: https://ssrn.com/abstract=2550021

Andreas Bergh (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

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HOME PAGE: http://www.ifn.se/web/AndreasB

Lund University - Department of Economics ( email )

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HOME PAGE: http://www.nek.lu.se/

Christian Bjørnskov

Aarhus University - Department of Economics and Business ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Center for Political Studies

Landgreven 3
Copenhagen K, DK-1301
Denmark

Institute for Corruption Studies

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Normal, IL 61790-4200
United States

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