Social Capital and Monetary Policy

Rustam Jamilov

No 2219, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: The U.S. have experienced a significant decline in generalized trust over the past three decades. Has this secular trend impacted central banking? Empirically, we document that states with high levels of institutional and interpersonal trust are robustly more responsive to monetary policy shocks. Theoretically, we embed a circle of trust block into the New Keynesian framework in continuous time. The calibrated model predicts that monetary policy has become 20% less effective due to the decline in trust. Our findings firm up the social capital channel of monetary non-neutrality and warn that crises of trust could lead to crises of policy inefficacy.

Keywords: Monetary policy; trust; social capital (search for similar items in EconPapers)
JEL-codes: E5 E7 Z1 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2022-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2219

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