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Trust in the monetary authority

Dirk Bursian and Ester Faia ()

Journal of Monetary Economics, 2018, vol. 98, issue C, 66-79

Abstract: Trust in policy makers fluctuates significantly over the cycle, evaporating during crises and affecting the transmission mechanism. Despite this, it is absent from the literature. We build a monetary model where trust emerges endogenously as an equilibrium of a strategic interaction (moral hazard with uncertainty on policy actions) between betrayal-averse agents and policy makers with stochastic incentives to deviate, conditioned on past policy outcomes as signals. A fall in trust, due to shocks or policy actions, increases the price that agents attach to future contingencies, amplifies fluctuations, and steepens the sacrifice ratio. We test the transmission of shocks through VAR analyses where trust is proxied by answers to the Eurobarometer surveys.

Keywords: Trust games; Betrayal aversion; Monetary transmission mechanism (search for similar items in EconPapers)
JEL-codes: E0 E5 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Trust in the Monetary Authority (2015) Downloads
Working Paper: Trust in the monetary authority (2013) Downloads
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DOI: 10.1016/j.jmoneco.2018.04.009

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