Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media

Alistair Macaulay and Wenting Song

Staff Working Papers from Bank of Canada

Abstract: This paper studies the role of narratives for macroeconomic fluctuations. We micro-found narratives as directed acyclic graphs and show how exposure to different narratives can affect expectations in an otherwise standard macroeconomic model. We capture such competing narratives in news media’s reports on a US yield curve inversion by using techniques in natural language processing. Linking these media narratives to social media data, we show that exposure to a recessionary narrative is associated with a more pessimistic sentiment, while exposure to a nonrecessionary narrative implies no such change in sentiment. In a model with financial frictions, narrative-driven beliefs create a trade-off for quantitative easing: extended periods of quantitative easing make narrative-driven waves of pessimism more frequent, but smaller in magnitude.

Keywords: Financial markets; Inflation and prices; Monetary policy (search for similar items in EconPapers)
JEL-codes: D84 E32 E43 E44 E5 G1 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-big, nep-cba, nep-fdg, nep-mac and nep-mon
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Related works:
Working Paper: Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media (2022)
Working Paper: Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-23

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