"The Macroeconomics of Narratives" with Joel P Flynn
Please note this is during the usual Macroeconomics Working Group slot
We study the macroeconomic implications of narratives, or beliefs about the economy that affect decisions and spread contagiously. Empirically, we use natural-language-processing methods to measure textual proxies for narratives in US public firms’ end-of-year reports (Forms 10-K). We find that: (i) firms’ hiring decisions respond strongly to narratives, (ii) narratives spread contagiously among firms, and (iii) this spread is responsive to macroeconomic conditions. To understand the macroeconomic implications of these forces, we embed a contagious optimistic narrative in a business-cycle model. We characterize, in terms of the decision-relevance and contagiousness of narratives, when the unique equilibrium features: (i) non-fundamental business cycles, (ii) non-linear belief dynamics (narratives “going viral”) that generate multiple stable steady states (hysteresis), and (iii) the coexistence of hump-shaped responses to small shocks with regime-shifting behavior in response to large shocks. Our empirical estimates discipline both the static, general equilibrium effect of narratives on output and their dynamics. In the calibrated model, we find that contagious optimism explains 32% and 18% of the output reductions over the early 2000s recession and Great Recession, respectively, as well as 19% of the unconditional variance in output. We find that overall optimism is not sufficiently contagious to generate hysteresis, but other, more granular narratives are.
Date: 3 March 2023, 13:00 (Friday, 7th week, Hilary 2023)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Seminar Room A or https://zoom.us/j/97517816438?pwd=QzlRRlpENG52ZG8zMk92K3A5V2wxQT09
Speaker: Karthik Sastry (Harvard University)
Organising department: Department of Economics
Part of: Macroeconomics Seminar
Booking required?: Not required
Audience: Public
Editor: Emma Heritage