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Does Trust Favor Macroeconomic Stability?

Author

Listed:
  • Marc Sangnier

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)

Abstract
This paper investigates the relationship between trust and macroeconomic volatility. An illustrative model rationalizes the relationship between trust and volatility. In this model, trust relaxes credit constraints and diminishes investment's procyclicality. I provide empirical evidence for the basic predictions of the model. Then, I show that higher trust is associated with lower macroeconomic volatility in a cross section of countries. This relationship persists when various covariates are taken into account. I use inherited trust of Americans as an instrumental variable for trust in their origin country to overcome reverse causality concerns. Using changes in inherited trust over the 20th century, I do not find clear evidence that increasing trust is also associated with decreasing volatility across time at the country level.

Suggested Citation

  • Marc Sangnier, 2012. "Does Trust Favor Macroeconomic Stability?," AMSE Working Papers 1227, Aix-Marseille School of Economics, France.
    • Handle: RePEc:aim:wpaimx:1227
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    More about this item

    Keywords

    Trust; volatility; macroeconomic stability; social capital.;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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