Populism, Institutional Trust, and Monetary Policy - Nora Lamersdorf

Speaker: Nora Lamersdorf, BI Norwegian Business School

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

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Abstract: This paper examines how populism influences the transmission of monetary policy to firms’ credit demand. Using credit-registry data from Germany and voter shares for the populist party AfD, I find that firms in districts with higher AfD voter shares exhibit weaker adjustments in credit demand in response to monetary policy shocks. Firm survey data reveal that low trust in the ECB is associated with similarly muted credit demand responses, highlighting trust as a potential channel. Inflation expectations also play an essential role: firms in high-populism districts or with low central bank trust report higher inflation expectations and adjust them less in response to monetary policy shocks. To explore the role of the media, I analyze AfD-affiliated tweets and find that these sources often fail to convey accurate information on monetary policy, potentially contributing to biased perceptions. To rationalize these findings, I extend a New Keynesian model to incorporate biased perceptions of monetary policy. The model demonstrates how distorted perceptions weaken policy transmission and exacerbate adverse shocks, posing significant challenges for central banks aiming to sustain policy effectiveness in environments marked by strong populist sentiment.