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.
JEL-codes: G12, A13
Keywords: Trust, credit ratings, interest rates, economic reforms
Bergh, A., Bjørnskov, C. (2014). Trust Us to Repay: Social Trust, Long-Term Interest Rates and Sovereign Credit Rating. IFN Working Paper No. 1039, 2014