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Social Capital and Monetary Policy

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  • Rustam Jamilov

Abstract

This paper studies the social capital channel of monetary non-neutrality in the United States. Empirically, identification is achieved by combining state-level local projections and high-frequency monetary surprises with survey data on trust, historical accounts of slavery from the 1860 Census, and the Trump vote. I find that states with high social capital - as measured by high trust towards institutions, low slavery intensity, or low Trump vote - are more responsive to monetary policy shocks. Theoretically, I embed a micro-founded circle of trust block into the New Keynesian model in continuous time. Equilibrium reduces to a four-equation NK model with distrust dampening the potency of monetary policy shocks, like in the data, and reducing the possibility of determinate equilibria. The framework also formalizes an equilibrium interaction between social capital, monetary policy and populism cycles - an exogenous decline in institutional trust boosts scepticism and weakens monetary policy.

Suggested Citation

  • Rustam Jamilov, 2021. "Social Capital and Monetary Policy," Economics Series Working Papers 952 JEL classification:, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:952
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    Keywords

    Social capital; trust; monetary policy; central banking; macroeconomics; populism;
    All these keywords.

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