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Does trust favor macroeconomic stability?

  • Marc Sangnier

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

This paper investigates the relationship between trust and macroeconomic volatility. In a cross section of countries, we show that higher trust is associated with lower macroeconomic instability. We use the inherited trust of Americans as an instrumental variable of trust in their origin country to overcome all potential reverse causality concerns. We use changes in inherited trust over the XXth century to show that increasing trust also decreases volatility across time. Thus, trust is shown to be an important determinant of macroeconomic stability both in space and time. Finally, we show that trust reduces investment volatility but not public expenditure volatility.

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Paper provided by HAL in its series PSE Working Papers with number halshs-00575021.

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Date of creation: Oct 2009
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Handle: RePEc:hal:psewpa:halshs-00575021
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