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Trust Us to Repay: Social Trust, Long‐Term Interest Rates, and Sovereign Credit Ratings

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  • Andreas Bergh
  • Christian Bjørnskov

Abstract

This paper asks whether the sensitivity of market long‐term interest rates and credit ratings is associated with cross‐country differences in social trust. We note a number of theoretical mechanisms that suggest that macroeconomic shocks are more likely to be effectively dealt with in higher‐trust societies. A set of panel estimates across middle‐ and high‐income countries reveals that interest rates and credit ratings are substantially more sensitive to inflation and growth problems in low‐trust countries. This finding sheds light on the differential market reactions to macroeconomic problems in seemingly comparable countries.

Suggested Citation

  • Andreas Bergh & Christian Bjørnskov, 2021. "Trust Us to Repay: Social Trust, Long‐Term Interest Rates, and Sovereign Credit Ratings," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 1151-1174, August.
    • Handle: RePEc:wly:jmoncb:v:53:y:2021:i:5:p:1151-1174
    DOI: 10.1111/jmcb.12812
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    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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