The Macroeconomics of Narratives

153 Pages Posted: 27 Jun 2022 Last revised: 29 Sep 2022

See all articles by Joel P. Flynn

Joel P. Flynn

Massachusetts Institute of Technology (MIT) - Department of Economics

Karthik Sastry

Harvard University, Department of Economics

Date Written: September 28, 2022


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.

Keywords: Narratives, Business Cycles, Expectations, Sentiment, Contagion, Optimism

JEL Classification: E32, E70, D84

Suggested Citation

Flynn, Joel P. and Sastry, Karthik, The Macroeconomics of Narratives (September 28, 2022). Available at SSRN: or

Joel P. Flynn (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Cambridge, MA 02142
United States

Karthik Sastry

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

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