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The role of sentiment in the US economy: 1920 to 1934 |
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| Authors: | Ali Kabiri Harold James John Landon-Lane David Tuckett Rickard Nyman |
| Institution: | 1. University of Buckingham and FMG, London School of Economics and Political Science
University College, London, Centre for the Study of Decision-Making Uncertainty;2. Princeton University;3. Rutgers University;4. University College, London, Centre for the Study of Decision-Making Uncertainty |
| Abstract: | This paper investigates the role of sentiment in the US economy from 1920 to 1934 using digitised articles from The Wall Street Journal. We derive a monthly sentiment index and use a 10-variable vector error correction model to identify sentiment shocks that are orthogonal to fundamentals. We show the timing and strength of these shocks and their resultant effects on the economy using historical decompositions. Intermittent impacts of up to 15 per cent on industrial production, 10 per cent on the S&P 500 and bank loans, and 37 basis points for the credit risk spread suggest a large role for sentiment. |
| Keywords: | algorithmic text analysis business sentiment Great Depression US interwar economy |