The role of sentiment in the economy: 1920 to 1934

Ali Kabiri, Harold James, John Landon-Lane (), David Tuckett and Rickard Nyman

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper investigates the role of sentiment in the US macro economy from 1920 to 1934. We use 2.4 million digitized articles from the Wall St Journal to algorithmically derive a monthly sentiment index. A ten variable vector error correction model is then used to identify shocks to sentiment that are orthogonal to the fundamentals of the economy. We show that the identified "pure" sentiment shocks have economically significant effects on Industrial Production, the S&P500 stock index, money supply (M2), credit spreads, terms spreads, interest rates and prices. We are further able to delineate both the timing and strength of the shocks and their subsequent effects on the economy using historical decompositions. These suggest impacts of up to 9%.

Keywords: Great Depression; general theory; algorithmic text analysis; behavioural economics (search for similar items in EconPapers)
JEL-codes: D89 E32 N30 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2021-02-25
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Downloads: (external link)
http://eprints.lse.ac.uk/118889/ Open access version. (application/pdf)

Related works:
Working Paper: The Role of Sentiment in the U.S. Economy: 1920 to 1934 (2022)
Working Paper: The Role of Sentiment in the Economy: 1920 to 1934 (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118889

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