Bringing Social-Psychological Variables into Economic Modelling: Uncertainty, Animal Spirits and the Recovery from the Great Recession

Abstract

Conviction narrative theory (CNT), a social psychological approach to the way economic agents take deisions under Knightian uncertainty, together with the new methodology of directed algorithmic text analysis (DATA), provide the opportunity for a theory of economic sentiment or animal sprits grounded in empirical facts. Applying DATA to the full text of the daily Reuters news feeds from January 1996 through November 2013, we derive an “animal spirits” series for both the US and the UK economy. Both series inform the movements in real GDP over the period. For example, in both countries there is a marked downturn in animal spirits in June 2007, well in advance of other indicators of the coming recession. The series may also explain why the subseqeunt recovery has been exceptionally weak from a historical perspective.

Keywords: Conviction narrative theory, Directed Algorithmic Text Analysis, Macroeconomics, Big Data, animal spirits; Knightian uncertainty; Great Recession; recovery

JEL Classification: C82, D83, D84, E32