Heterogeneous Information, Subjective Model Beliefs, and the Time-Varying Transmission of Shocks

Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media

“…We provide empirical evidence on the importance of narratives by studying narratives around the yield curve inversion in 2019. This complements survey-based evidence from Andre et al (2022b) and Kendall and Charles (2022), who conduct survey experiments to establish the causal effects of narratives on expectations, and Macaulay (2022) who presents evidence from UK household surveys on the importance of inflation narratives. Our empirical framework has the benefit of providing an ongoing measure of narratives outside of existing surveys, as illustrated with an application to inflation narratives by Macaulay and Song (2022), documenting the evolving prevalence and impact of competing inflation narratives.…”

Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media

“…We instead capture narratives as news media's competing interpretations of the same underlying economic event, which is motivated by our theoretical framework and models of competing narratives (Eliaz and Spiegler, 2020). We provide direct evidence on the importance of narratives by exploiting the natural experiment of the yield curve inversion in 2019, complementing survey-based evidence from Andre et al (2022b) who conduct survey experiments to establish the causal effects of narratives on expectations, and Macaulay (2022) who presents evidence from UK household surveys on the importance of inflation narratives. Our empirical framework has the benefit of providing an ongoing measure of narratives outside of existing surveys, as we illustrate with the analysis on inflation narratives.…”

“…A narrative linking inflation with household income may induce very different responses of expectations when inflation is high than when it is low. Indeed, recent empirical evidence suggests households perceive substantially more negative consequences of inflation for real variables when they perceive that realized inflation is high (Drager, Lamla and Pfajfar, 2020;Macaulay, 2022). Formally, the inflation narratives we study generate conditional expectations functions (i.e.…”

“…In the language ofMacaulay (2022), our narratives specify only the subjective model component of expectations, so the effects of changing subjective model will depend on the information component of expectations at which the change occurs.…”

A Behavioral Heterogeneous Agent New Keynesian Model

“…The method proposed inPfäuti (2023) builds onMackowiak et al (2023) andVellekoop and Wiederholt (2019).4 Agents' subjective model need not necessarily be consistent with the actual law of motion (seeAndre et al (2022);Macaulay (2022) for empirical evidence that the subjective models agents hold may not necessarily be consistent with the actual behavior of the economy or with experts' subjective models).…”