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Trust Us to Repay: Social Trust, Long‐Term Interest Rates, and Sovereign Credit Ratings
Author(s) -
Bergh Andreas,
Bjørnskov Christian
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12812
Subject(s) - interest rate , inflation (cosmology) , social trust , term (time) , economics , monetary economics , bond market , sovereignty , credit rating , actuarial science , social capital , political science , politics , physics , quantum mechanics , law , theoretical physics
This paper asks whether the sensitivity of market long‐term interest rates and credit ratings is associated with cross‐country differences in social trust. We note a number of theoretical mechanisms that suggest that macroeconomic shocks are more likely to be effectively dealt with in higher‐trust societies. A set of panel estimates across middle‐ and high‐income countries reveals that interest rates and credit ratings are substantially more sensitive to inflation and growth problems in low‐trust countries. This finding sheds light on the differential market reactions to macroeconomic problems in seemingly comparable countries.