Trust in the Monetary Authority

Ester Faia and Dirk Bursian

No 10541, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Trust in policy makers fluctuates significantly over the cycle and affects the transmission mechanism. Despite this it is absent from the literature. We build a monetary model embedding trust cycles; the latter emerge as an equilibrium phenomenon of a game-theoretic interaction between atomistic agents and the monetary authority. Trust affects agents' ?stochastic discount factors, namely the price of future risk, and through this it interacts with the monetary transmission mechanism. Using data from the Eurobarometer surveys, we analyze the link between trust and the transmission mechanism of macro and monetary shocks. Empirical results are in line with theoretical ones.

Keywords: Betrayal aversion; Monetary transmission system; Trust games (search for similar items in EconPapers)
JEL-codes: C7 C8 E0 E5 G12 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Trust in the monetary authority (2018)
Working Paper: Trust in the monetary authority (2013)
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