The Power of Narratives in Economic Forecasts

Christopher A. Hollrah (), Steven A. Sharpe and Nitish R. Sinha
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Steven A. Sharpe: https://www.federalreserve.gov/econres/steven-a-sharpe.htm
Nitish R. Sinha: https://www.federalreserve.gov/econres/nitish-r-sinha.htm

No 2020-001, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We apply textual analysis tools to the narratives that accompany Federal Reserve Board economic forecasts to measure the degree of optimism versus pessimism expressed in those narratives. Text sentiment is strongly correlated with the accompanying economic point forecasts, positively for GDP forecasts and negatively for unemployment and inflation forecasts. Moreover, our sentiment measure predicts errors in FRB and private forecasts for GDP growth and unemployment up to four quarters out. Furthermore, stronger sentiment predicts tighter than expected monetary policy and higher future stock returns. Quantile regressions indicate that most of sentiment’s forecasting power arises from signaling downside risks to the economy and stock prices.

Keywords: Text analysis; Economic forecasts; Monetary policy; Stock returns; Narratives (search for similar items in EconPapers)
JEL-codes: C53 E17 E27 E37 E52 G14 (search for similar items in EconPapers)
Pages: 54 p.
Date: 2020-01-03
New Economics Papers: this item is included in nep-big, nep-for, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-01

DOI: 10.17016/FEDS.2020.001

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