The Role of Sentiment in the Economy of the 1920s

57 Pages Posted: 5 Jun 2020

See all articles by Ali Kabiri

Ali Kabiri

University of Buckingham - Department of Economics and International Studies; Financial Markets Group - LSE

Harold James

Princeton University - Department of History; National Bureau of Economic Research (NBER)

John Landon-Lane

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics

David Tuckett

University College London - Centre for the Study of Decision-Making Uncertainty

Rickard Nyman

University College London - Centre for the Study of Decision-Making Uncertainty

Date Written: 2020

Abstract

John Maynard Keynes composed The General Theory as a response to the Great Crash and Great Depression with all their devastating consequences for the US macro economy and financial markets, as well as the rest of the world. The role of expectations his new theory set out has been widely accepted. The role of "animal spirits" he proscribed (i.e. the role of emotion in cognition) has remained much more controversial. We analyse over two million digitally stored news articles from The Wall St Journal to construct a sentiment series that we use to measure the role of emotion at the time Keynes wrote. An eight 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 do have statistically and economically significant effects on output, money supply (M2), and the stock market for periods of the 1920s.

Keywords: Great Depression, general theory, algorithmic text analysis, behavioural economics

JEL Classification: D890, E320, E700, N100, N300

Suggested Citation

Kabiri, Ali and James, Harold and Landon-Lane, John and Tuckett, David and Nyman, Rickard, The Role of Sentiment in the Economy of the 1920s (2020). CESifo Working Paper No. 8336, Available at SSRN: https://ssrn.com/abstract=3619685 or http://dx.doi.org/10.2139/ssrn.3619685

Ali Kabiri (Contact Author)

University of Buckingham - Department of Economics and International Studies ( email )

United States

Financial Markets Group - LSE ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Harold James

Princeton University - Department of History ( email )

Princeton, NJ 08544
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John Landon-Lane

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

David Tuckett

University College London - Centre for the Study of Decision-Making Uncertainty ( email )

Gower Street
London, WC1 6BT
United Kingdom

HOME PAGE: http://www.ucl.ac.uk/psychoanalysis/unit-staff/david.htm

Rickard Nyman

University College London - Centre for the Study of Decision-Making Uncertainty ( email )

Gower Street
London, WC1 6BT
United Kingdom

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