The Macroeconomics of Narratives

Joel P. Flynn and Karthik Sastry

No 32602, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the macroeconomic implications of narratives, defined as beliefs about the economy that spread contagiously. In an otherwise standard business-cycle model, narratives generate persistent and belief-driven fluctuations. Sufficiently contagious narratives can "go viral," generating hysteresis in the model's unique equilibrium. Empirically, we use natural-language-processing methods to measure firms' narratives. Consistent with the theory, narratives spread contagiously and firms expand after adopting optimistic narratives, even though these narratives have no predictive power for future firm fundamentals. Quantitatively, narratives explain 32% and 18% of the output reductions over the early 2000s recession and Great Recession, respectively, and 19% of output variance.

JEL-codes: D84 E32 E70 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-bec, nep-mac and nep-neu
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