Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1039: Trust Us to Repay: Social Trust, Long-Term Interest Rates and Sovereign Credit Ratings

Andreas Bergh ()
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Andreas Bergh: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

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

JEL-codes: A13; G12

34 pages, September 3, 2014

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