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Business cycle narratives

Vegard Larsen and Leif Thorsrud

No No 6/2018, Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School

Abstract: This article quantifies the epidemiology of media narratives relevant to business cycles in the US, Japan, and Europe (euro area). We do so by first constructing daily business cycle indexes computed on the basis of the news topics the media writes about. At a broad level, the most in uential news narratives are shown to be associated with general macroeconomic developments, finance, and (geo-)politics. However, a large set of narratives contributes to our index estimates across time, especially in times of expansion. In times of trouble, narratives associated with economic uctuations become more sparse. Likewise, we show that narratives do go viral, but mostly so when growth is low. While narratives interact in complicated ways, we document that some are clearly associated with economic fundamentals. Other narratives, on the other hand, show no such relationship, and are likely better explained by classical work capturing the market's animal spirits.

Keywords: Business cycles; Narratives; Dynamic Factor Model (DFM); Latent Dirichlet Allocation (LDA) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-big, nep-his and nep-mac
Date: 2018-04
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Working Paper: Business Cycle Narratives (2019) Downloads
Working Paper: Business cycle narratives (2018) Downloads
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