Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/219154 
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8336
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
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.
Subjects: 
Great Depression
general theory
algorithmic text analysis
behavioural economics
JEL: 
D89
E32
E70
N10
N30
Document Type: 
Working Paper
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