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Financial stress and economic growth: The moderating role of trust

Author

Listed:
  • Panagiota Makrychoriti

    (Birkbeck College [University of London])

  • Fotios Pasiouras

    (Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School, MRM - Montpellier Research in Management - UPVD - Université de Perpignan Via Domitia - UM - Université de Montpellier)

  • Menelaos Tasiou

    (University of Portsmouth)

Abstract

The literature suggests that trust can influence the behavior of economic agents and improve access to financing for both households and corporations. Subsequently, this might have implications for the consumption of households and the investments of corporations. Therefore, trust could mitigate the negative impact of financial stress on economic growth. To test this hypothesis, we use a sample of EU countries over the period 2002–2020 and examine the interaction of trust with financial stress in shaping GDP growth. The interaction term enters the estimations with a positive and statistically significant coefficient, and it therefore mitigates the negative impact of financial stress on economic growth. Furthermore, by disaggregating the GDP into its four main components, we find that the moderating effect of trust flows through the two main components of GDP mentioned above, namely households' consumption and firms' investments. Additionally, we observe that the interaction effect becomes weaker in countries with a higher economic freedom and is strengthened in centre and left‐wing governments compared to right‐wing economically oriented ones.

Suggested Citation

  • Panagiota Makrychoriti & Fotios Pasiouras & Menelaos Tasiou, 2022. "Financial stress and economic growth: The moderating role of trust," Post-Print hal-05085115, HAL.
    • Handle: RePEc:hal:journl:hal-05085115
    DOI: 10.1111/kykl.12285
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    Cited by:

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    2. Dimitrios Asteriou & Konstantinos Spanos & Emmanouil Trachanas, 2024. "Financial development, economic growth and the role of fiscal policy during normal and stress times: Evidence for 26 EU countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2495-2514, April.
    3. Pasiouras, Fotios & Samet, Anis, 2022. "Social capital and the cost of bank equity: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 141(C).
    4. Akeem Rahaman & Scott Mark Romeo Mahadeo, 2024. "Constructing country-specific debt sustainability indices for developing countries," Working Papers in Economics & Finance 2024-01, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.

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