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The power of narrative sentiment in economic forecasts

Author

Listed:
  • Sharpe, Steven A.
  • Sinha, Nitish R.
  • Hollrah, Christopher A.
Abstract
The sentiment, or “Tonality”, extracted from the narratives that accompany Federal Reserve economic forecasts (in the Greenbook) is strongly correlated with future economic performance, positively with GDP, and negatively with unemployment and inflation. More notably, Tonality conveys substantial incremental information in that it predicts errors in Federal Reserve and even in private-sector point forecasts of unemployment and GDP up to four quarters ahead. More favorable sentiment predicts economic performance that exceeds point forecasts. Higher Tonality also predicts positive monetary policy (fed funds rate) surprises and higher stock returns up to four quarters ahead. Quantile regressions suggest that much of Tonality’s forecasting power arises from its signal of downside risks to both economic performance and stock returns. If observed in real time, tonality would have been most informative about economic prospects and stock returns when economic uncertainty was high or when point forecasts called for subpar GDP growth.

Suggested Citation

  • Sharpe, Steven A. & Sinha, Nitish R. & Hollrah, Christopher A., 2023. "The power of narrative sentiment in economic forecasts," International Journal of Forecasting, Elsevier, vol. 39(3), pages 1097-1121.
    • Handle: RePEc:eee:intfor:v:39:y:2023:i:3:p:1097-1121
    DOI: 10.1016/j.ijforecast.2022.04.008
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    Cited by:

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    3. Joshua Eklund & Jong‐Min Kim, 2024. "Forecasting Consumer Price Index with Federal Open Market Committee Sentiment Index," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(6), pages 1795-1813, September.
    4. Daniel Aromí & Daniel Heymann, 2024. "Talk to Fed: a Big Dive into FOMC Transcripts," Working Papers 323, Red Nacional de Investigadores en Economía (RedNIE).

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    More about this item

    Keywords

    Text Analysis; Economic Forecasts; Unemployment Rate; Inflation; Monetary Policy; Stock Returns;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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