Abstract
AbstractThis 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.
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