Trust crisis in the financial sector and macroeconomic stability: a structural equation modelling approach

Abstract

Although the growing body of literature that recognises a destabilising role of the trust crisis in the macroeconomic stability, the understanding of mediational pathways remains limited. The current paper fills the gap by contributing to the existing literature by examining closely the mediating effect of the trust crisis in the financial sector on the indicators of macroeconomic stability due to the anticipated impact of the financial intermediation development and the monetary policy transmission mechanism, as well as their combinatorial impact. A method of structural equation modelling was used to analyse the input data. It has been empirically confirmed that exacerbation of the trust crisis in the financial sector without the use of regulatory measures is detrimental to macroeconomic stability. The results of the mediation analysis show that transmission channels of the monetary policy mechanism and developed financial sector mitigate the harmful effects of deepening the trust crisis in the financial sector and lead to an increase in macroeconomic stability indicators. From a practical perspective, the findings revealed that interest, credit, and currency channels of the monetary policy transmission mechanism could be used to cope with the erosion of the trust crisis in the financial sector to macroeconomic stability.

Keywords:

• Trust crisis
• macroeconomic stability
• financial sector development
• transmission mechanism

SUBJECT CLASSIFICATION CODES:

• E320
• E710
• G41
• O160

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work would not have been possible without the financial support of the Ministry of Education and Science of Ukraine. The paper was prepared as part of the Young Scientist Research on the topic “Economic-mathematical modelling of the mechanism for restoring public trust in the financial sector: a guarantee for economic security of Ukraine” (registration number 0117U003924); “Modelling and forecasting of the socio-economic-political road map of reforms in Ukraine for the transition to a sustainable growth model” (registration number 0118U003569).