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

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Abstract

This paper asks whether the sensitivity of market long-term interest rates and credit ratings is associated with cross-country differences in informal institutions, measured by social trust. We note a number of theoretical mechanisms that could imply that similar objective problems are more likely to be effectively dealt with in higher-trust societies. A set of panel estimates across middle and high-income countries reveal that interest rates and ratings are substantially more sensitive to inflation and growth problems in low-trust countries. This finding sheds light on the differential market reactions to economic problems in seemingly comparable countries.

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  • Bergh, Andreas, 2014. "Trust Us to Repay: Social Trust, Long-Term Interest Rates and Sovereign Credit Ratings," Working Paper Series 1039, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:1039
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    1. Stephen Knack & Philip Keefer, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1251-1288.
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    4. Klaus M. Schmidt, 2011. "Social Preferences and Competition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 207-231, August.
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    12. Christian Bjørnskov, 2010. "How does social trust lead to better governance? An attempt to separate electoral and bureaucratic mechanisms," Public Choice, Springer, vol. 144(1), pages 323-346, July.
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    More about this item

    Keywords

    Trust; Credit ratings; Interest rates; Economic reforms;

    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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