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.
Highlights
It is impossible to exaggerate the role of trust in the financial sector of the economy
We explore the impact of the trust crisis in the financial sector on macroeconomic stability, where financial sector development and monetary policy transmission mechanisms were analysed as mediators
This study went beyond prior research and showed that the trust crisis in the financial sector is inferred from the devaluation of the national currency against the US dollar, number of Ukrainian banks, in respect of which a banking license has been revoked by the National Bank of Ukraine, and the unemployment rate, that could be measured directly based on official statistics
Summary
It is impossible to exaggerate the role of trust in the financial sector of the economy. The financial system is deformed, and without a well-functioning financial system, it is impossible to ensure the macroeconomic stability and the potential for the country’s development. Finance theory have led to an increase in empirical studies of the influence of fundamental factors, including psychological ones, on the dynamics of macroeconomic stability and the development of the country. The main criticism of such studies, aimed at examining the interconnection of various aspects of behavioural finance, including public trust, confidence, optimism, is related to the difficulty of quantifying behavioural categories in the economy. Even identifying the causes of behavioural distortions based on statistics and market data does not solve the problem of formalising their impact on the financial sector development or the economy as a whole
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