Trust in the Monetary Authority
SAFE Working Paper No. 14
48 Pages Posted: 5 Apr 2013 Last revised: 18 Jul 2013
Date Written: July 1, 2013
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: Suggested Citation