The role of sentiment in the economy: 1920 to 1934

Kabiri, Ali, James, Harold, Landon-Lane, John, Tuckett, David and Nyman, Rickard (2021) The role of sentiment in the economy: 1920 to 1934. Financial Markets Group Discussion Papers (800). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

This paper investigates the role of sentiment in the US macro economy from 1920 to 1934. We use 2.4 million digitized articles from the Wall St Journal to algorithmically derive a monthly sentiment index. A ten variable vector error correction model is then used to identify shocks to sentiment that are orthogonal to the fundamentals of the economy. We show that the identified "pure" sentiment shocks have economically significant effects on Industrial Production, the S&P500 stock index, money supply (M2), credit spreads, terms spreads, interest rates and prices. We are further able to delineate both the timing and strength of the shocks and their subsequent effects on the economy using historical decompositions. These suggest impacts of up to 9%.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2021 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D89 - Other E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles N - Economic History > N3 - Labor and Consumers, Demography, Education, Health, Income, and Wealth > N30 - Economic History: Labor and Consumers, Demography, Education, Health, Income and Wealth: General, International, or Comparative (Migration)
Date Deposited:	23 May 2023 13:30
Last Modified:	11 Dec 2024 19:45
URI:	http://eprints.lse.ac.uk/id/eprint/118889

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