Trust in the Monetary Authority

SAFE Working Paper No. 14

48 Pages Posted: 5 Apr 2013 Last revised: 18 Jul 2013

See all articles by Dirk Bursian

Dirk Bursian

Goethe University Frankfurt; Deutsche Bundesbank

Ester Faia

Goethe University Frankfurt; Kiel Institute for the World Economy; University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2013

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: trust evolutionary games, risk perception, monetary transmission mechanism

JEL Classification: E0, E5

Suggested Citation

Bursian, Dirk and Faia, Ester, Trust in the Monetary Authority (July 1, 2013). SAFE Working Paper No. 14. Available at SSRN: https://ssrn.com/abstract=2245574 or http://dx.doi.org/10.2139/ssrn.2245574

Dirk Bursian

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt/Main, 60323
Germany

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Ester Faia (Contact Author)

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Kiel Institute for the World Economy

P.O. Box 4309
Kiel, D-24100
Germany

University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France

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