Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297408 
Year of Publication: 
2023
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2023-23
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper studies the role of narratives for macroeconomic fluctuations. We micro-found narratives as directed acyclic graphs and show how exposure to different narratives can affect expectations in an otherwise standard macroeconomic model. We capture such competing narratives in news media's reports on a US yield curve inversion by using techniques in natural language processing. Linking these media narratives to social media data, we show that exposure to a recessionary narrative is associated with a more pessimistic sentiment, while exposure to a nonrecessionary narrative implies no such change in sentiment. In a model with financial frictions, narrative-driven beliefs create a trade-off for quantitative easing: extended periods of quantitative easing make narrative-driven waves of pessimism more frequent, but smaller in magnitude.
Subjects: 
Inflation and prices
Financial markets
Monetary policy
JEL: 
D84
E32
E43
E44
E5
G1
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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