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The role of sentiment in the US economy: 1920 to 1934

Author

Listed:
  • Kabiri, Ali
  • James, Harold
  • Landon-Lane, John
  • Tuckett, David
  • Nyman, Rickard

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.

Suggested Citation

  • Kabiri, Ali & James, Harold & Landon-Lane, John & Tuckett, David & Nyman, Rickard, 2023. "The role of sentiment in the US economy: 1920 to 1934," LSE Research Online Documents on Economics 114597, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:114597
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    File URL: http://eprints.lse.ac.uk/114597/
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    More about this item

    Keywords

    algorithmic text analysis; business sentiment; Great Depression; US interwar economy; EP/P016847/1; ESRC-NIESR Rebuilding Macroeconomics network;
    All these keywords.

    JEL classification:

    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

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