The macroeconomics of narratives

 [[{“value”:”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
The post The macroeconomics of narratives appeared first on Marginal REVOLUTION.”}]] 

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.

That is from a new NBER working paper by Joel P. Flynn and Karthik Sastryx.

The post The macroeconomics of narratives appeared first on Marginal REVOLUTION.

 Economics