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Does trust favor macroeconomic stability?

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  • Sangnier, Marc

Abstract

This paper investigates the relationship between trust and macroeconomic volatility. An illustrative model rationalizes the relationship between trust and volatility. In this model, trust relaxes credit constraints and diminishes investment’s procyclicality. I provide empirical evidence for the basic predictions of the model. Then, I show that higher trust is associated with lower macroeconomic volatility in a cross section of countries. This relationship persists when various covariates are taken into account. I use inherited trust of Americans as an instrumental variable for trust in their origin country to overcome reverse causality concerns. Using changes in inherited trust over the 20th century, I do not find clear evidence that increasing trust is also associated with decreasing volatility across time at the country level.

Suggested Citation

  • Sangnier, Marc, 2013. "Does trust favor macroeconomic stability?," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 653-668.
  • Handle: RePEc:eee:jcecon:v:41:y:2013:i:3:p:653-668 DOI: 10.1016/j.jce.2012.10.002
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    Cited by:

    1. Bergh, Andreas & Bjørnskov, Christian, 2016. "Burying the Bumblebee Once and for All:," Working Paper Series 1119, Research Institute of Industrial Economics.
    2. Julie Moschion & Domenico Tabasso, 2014. "Trust of second-generation immigrants: intergenerational transmission or cultural assimilation?," IZA Journal of Migration, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-30, December.
    3. Bergh, Andreas & Öhrvall, Richard, 2016. "The Moldable Young: How Institutions Impact Social Trust," Working Paper Series 1132, Research Institute of Industrial Economics.
    4. Giacomo Degli Antoni & Fabio Sabatini, 2013. "Disentangling the relationship between nonprofit and social capital: The role of social cooperatives and social welfare associations in the development of networks of strong and weak ties," Euricse Working Papers 1354, Euricse (European Research Institute on Cooperative and Social Enterprises).
    5. Yann Algan & Pierre Cahuc, 2010. "Inherited Trust and Growth," American Economic Review, American Economic Association, vol. 100(5), pages 2060-2092, December.
    6. Ugo Troiano & Giacomo Ponzetto, 2012. "Social Capital, Government Expenditures, and Growth," 2012 Meeting Papers 1048, Society for Economic Dynamics.
    7. Litina, Anastasia, 2014. "Great Expectations: The Persistent Effect of Institutions on Culture," MPRA Paper 58639, University Library of Munich, Germany.

    More about this item

    Keywords

    Trust; Volatility; Macroeconomic stability; Social capital;

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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