Trust dynamics after financial distress: evidence from Euro member countries

ABSTRACT

We investigate the dynamic adjustment of trust in the European Central Bank and the European Commission to financial distress using aggregate data from the Eurobarometer surveys and the financial distress indicator of Romer and Romer (2017). Financial distress has a pronounced negative impact on trust and the dynamic adjustment of trust is similar to the response of real GDP to financial distress. Weak labour market conditions prior to financial distress prolong the adjustment process.

KEYWORDS:

• Institutional trust
• financial distress
• dynamic adjustment
• local projections

JEL CLASSIFICATION:

• E58
• P16
• A13

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See Albinowski, Cizkowicz, and Rzonca (2014) on the relationship between trust in the ECB and interest rate policy.

² From Figure 1 we see that the impact of an increase in financial distress by one point is −2 percentage points after 4 quarters. An increase by 7 points, thus, results in a decrease by 14 percentage points.

³ Data on real GDP are from Romer and Romer (2019) and data on trust in national institutions are from Eurobarometer surveys.