Financial Stress and Economic Growth: The Moderating Role of Culture and Trust

Abstract

Using a sample of EU countries over the period 2002-2018, we find that a national culture of uncertainty avoidance and trust has a conditional role in the interplay between financial stress and economic growth. However, the cultural dimension of individualism does not appear to influence this relationship. By dis-aggregating the GDP into its four main components, we find that the moderating effect of uncertainty avoidance and trust flows through consumption and investments. The results also show that, during the global financial crisis, the moderation effect of trust is weaker in magnitude, whilst that of uncertainty avoidance is reinforced. Finally, by adopting a North-South EU divide perspective, we find that the results are mainly driven by the latter cluster of countries.

Keywords: Financial Stress, Culture, Psychology, Economic Growth

JEL Classification: G21, E71, O47