Trust and monetary policy

Paul De Grauwe and Yuemei Ji ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We analyze how trust affects the transmission of negative demand and supply shocks. We define trust to have two dimensions: there is trust in the central bank’s inflation target and trust in the future of economic activity. We use a behavioural macroeconomic model that is characterized by the fact that individuals lack the cognitive ability to understand the underlying model and to know the distribution of the shocks that hit the economy. We find, first, that when large negative demand shocks occur the subsequent trajectories taken by output gap and inflation typically coalesce around a good and a bad trajectory. Second, these good and bad trajectories are correlated with movements in trust. In the bad trajectories trust collapses, in the good trajectories it is not affected. This feature is stronger when a negative supply shock occurs than in the case of a negative demand shock. Third, initial conditions (history) matters. Unfavorable initial conditions drive the economy into a bad trajectory, favorable initial conditions produce good trajectories.

Pages: 54 pages
Date: 2022-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac, nep-mon, nep-pke and nep-soc
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cama.crawford.anu.edu.au/sites/default/fil ... 2022_degrauwe_ji.pdf (application/pdf)

Related works:
Journal Article: Trust and monetary policy (2024)
Working Paper: Trust and monetary policy (2024)
Working Paper: Trust and Monetary Policy (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2022-35

Access Statistics for this paper

More papers in CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Contact information at EDIRC.
Bibliographic data for series maintained by Cama Admin ().