The Macroeconomics of Narratives

We study the macroeconomic implications of viral, belief-altering narratives. Empirically, we use natural-language-processing methods to measure narratives in the text of all US public firms' end-of-year reports (Forms 10-K). We find that: (i) firms' hiring decisions respond strongly to narratives, (ii) narratives spread virally among firms, and (iii) this spread is responsive to macroeconomic conditions. We embed viral narratives in a Neoclassical business-cycle model. The unique equilibrium can feature: (i) non-fundamentally driven business-cycle fluctuations, (ii) multiple, self-fulfilling steady states (hysteresis), and (iii) the coexistence of hump-shaped responses to small shocks with regime-shifting behavior in response to large shocks. Conditional on calibrating standard preference and technological parameters, our empirical estimates identify both the static, general equilibrium effect of narratives on output and their dynamics. Statically, we find that aggregate fluctuations in narratives account for approximately 32% of the output reduction during the Early 2000s Recession and 18% during the Great Recession. Dynamically, we reject the possibility of narratively driven hysteresis for most, but not all, narratives