Forthcoming in Economics Letters: “Narrative Fragmentation and the Business Cycle”

“Narrative Fragmentation and the Business Cycle” with Isaiah Hull and Xin Zhang (Sveriges Riksbank Working Paper No. 401; This version: 01/2021)

  • Abstract: According to Shiller (2017), economic and financial narratives often emerge as a con- sequence of their virality, rather than their veracity, and constitute an important, but understudied driver of aggregate fluctuations. Using a unique dataset of news- paper articles over the 1950-2019 period and state-of-the-art methods from natural language processing, we characterize the properties of business cycle narratives. Our main finding is that narratives tend to consolidate around a dominant explanation during expansions and fragment into competing explanations during contractions. We also show that the existence of past reference events is strongly associated with increased narrative consolidation. (C63, D84, E32, E7)
The figure above shows the rolling mean of detrended GDP growth plotted against detrended, within-topic entropy, averaged over all topics for the sample period 1965-2019.
  • Keywords: Natural Language Processing, Machine Learning, Narrative Economics.