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Determinants of Trust in the European Central Bank

Determinants of Trust in the European Central Bank. Justina AV Fischer TWI, University of Konstanz Volker Hahn ETH Zurich Workshop ‘The First Decade of the Monetary Union’ Muenster, 29 May – 30 May. Why does trust in the ECB matter ?. Monetary policy

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Determinants of Trust in the European Central Bank

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  1. Determinants of Trust in the European Central Bank Justina AV Fischer TWI, University of Konstanz Volker Hahn ETH Zurich Workshop ‘The First Decade of the Monetary Union’ Muenster, 29 May – 30 May

  2. Why does trust in the ECB matter ? • Monetary policy • reputation (Kydland and Prescott, 1977; Barro and Gordon, 1983) • inflation expectations (New Keynesian models) • Trust as public support • Independence • Expansion of EMU

  3. Conjectures • Price stability as objective (Maastricht) => (changes in) inflation • Short-term/ lay men: economic performance • => national income (growth) • => unemployment rate • => labor market policies (signal) • => economic stabilizers (signal)

  4. Data • Eurobarometer surveys: National level of trust in the ECB (% answering “tend to trust”) • 12 countries, 1999 – 2004, start-up phase • GDP per capita • National inflation rate (general/specific goods) • Unemployment rate • Spending on unemployment benefits (% GDP) • Spending on active labor market policies (% GDP) • (WDI, EUROSTAT, OECD)

  5. Model + Method • Trustit = f(ECOit, population, country FE, time FE) + eit • FE GLS estimator • ECO lagged by one period

  6. National income

  7. Inflation and unemployment

  8. Inflation of non-durable goods

  9. Labor market policies

  10. Empirical conclusion • What matters to trust in the ECB • Inflation (-) • National Income (+) • Active labor market spending (-) • Unemployment spending (+) • What does not matter • Unemployment rate

  11. Robustness test: long-term GDP growth

  12. Robustness test: expectations on the economy

  13. Robustness: trust in other national and supranational institutions

  14. Robustness: Spillovers between institutions

  15. Robustness: knowledge about EU

  16. Policy implications • Inflation: ok • Start-up phase: greater sensitivity ? • Economic performance: dilemma. National policy affects trust in ECB. • Role of welfare state

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