Working Paper: CEPR ID: DP10541
Authors: Dirk Bursian; Ester Faia
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
JEL Codes: C7; C8; E0; E5; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trust (G21) | Shadow Price of Future Risk (G19) |
| Shadow Price of Future Risk (G19) | Aggregate Demand (E00) |
| Trust (G21) | Aggregate Demand (E00) |
| Monetary Restriction (E42) | Trust (G21) |
| Cost-Push Shock (E31) | Trust (G21) |
| Trust Shock (Z13) | Shadow Price of Future Risk (G19) |
| Trust Shock (Z13) | Aggregate Demand (E00) |
| Increase in Trust (Z13) | Future Inflation Expectations (D84) |