Financial stress and economic growth: the moderating role of culture and trust

Panagiota Makrychoritia, Fotios Pasiouras, Menelaos Tasiou

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Abstract

The literature suggests that trust can influence the behavior of economic agents and improve access to financing for both households and corporations. Subsequently, this might have implications for the consumption of households and the investments of corporations. Therefore, trust could mitigate the negative impact of financial stress on economic growth. To test this hypothesis, we use a sample of EU countries over the period 2002-2020 and examine the interaction of trust with financial stress in shaping GDP growth. The interaction term enters the estimations with a positive and statistically significant coefficient, and it therefore mitigates the negative impact of financial stress on economic growth. Furthermore, by disaggregating the GDP into its four main components, we find that the moderating effect of trust flows through the two main components of GDP mentioned above, namely households’ consumption and firms’ investments. Additionally, we observe that the interaction effect becomes weaker in countries with a higher economic freedom and is strengthened in centre and left-wing governments compared to right-wing economically-oriented ones
Original languageEnglish
Pages (from-to)48-74
Number of pages27
JournalKyklos: International Review of Social Sciences
Volume75
Issue number1
Early online date3 Dec 2021
DOIs
Publication statusPublished - 1 Feb 2022

Keywords

  • financial stress
  • trust
  • psychology
  • economic growth

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