We research the macroeconomic implications of narratives, outlined as beliefs concerning the financial system that unfold contagiously. In an in any other case customary business-cycle mannequin, narratives generate persistent and belief-driven fluctuations. Sufficiently contagious narratives can “go viral,” producing hysteresis within the mannequin’s distinctive equilibrium. Empirically, we use natural-language-processing strategies to measure corporations’ narratives. According to the speculation, narratives unfold contagiously and corporations broaden after adopting optimistic narratives, though these narratives don’t have any predictive energy for future agency fundamentals. Quantitatively, narratives clarify 32% and 18% of the output reductions over the early 2000s recession and Nice Recession, respectively, and 19% of output variance.
That’s from a brand new NBER working paper by Joel P. Flynn and Karthik Sastryx.
