Working Paper Series
Trust Us to Repay: Social Trust, Long-Term Interest Rates and Sovereign Credit Ratings
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.
Keywords: Trust; Credit ratings; Interest rates; Economic reforms; (follow links to similar papers)
JEL-Codes: A13; G12; (follow links to similar papers)
34 pages, September 3, 2014
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