Media reporting and business cycles: empirical evidence based on news data
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Media reporting and business cycles: empirical evidence based on news data Michael J. Lamla1,2 · Sarah M. Lein2,3 · Jan‑Egbert Sturm2,4 Received: 28 August 2017 / Accepted: 10 April 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract Recent literature suggests that news shocks could be an important driver of economic cycles. In this article, we use a direct measure of news sentiment derived from media reports. This allows us to examine whether innovations in the reporting tone correlate with changes in the assessment and expectations of the business situation as reported by firms in the German manufacturing sector. We find that innovations in news reporting affect business expectations, even when conditioning on the current business situation and industrial production. The dynamics of the empirical model confirm theoretical predictions that news innovations affect real variables such as production via changes in expectations. Looking at individual sectors within manufacturing, we find that macroeconomic news is at least as important for business expectations as sector-specific news. This is consistent with the existence of information complementarities across sectors. Keywords Media reporting · News-driven business cycles · Sectoral information complementarities JEL Classification E32 · D82
* Sarah M. Lein [email protected] Michael J. Lamla [email protected] Jan‑Egbert Sturm [email protected] 1
University of Essex, Colchester, UK
2
KOF ETH Zurich, Zurich, Switzerland
3
University of Basel, Basel, Switzerland
4
CESIfo, Munich, Germany
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1 Introduction The role of news as a driving force for business cycles has already been noted by Pigou (1927) and received renewed interest in recent years (see Beaudry and Portier 2014, for a survey). In these models, favorable news about future demand causes increased activity because firms invest more to make their goods available once higher demand materializes, and because agents increase consumption as they feel richer. If many agents rely on the same news source, such as media reports, their behavior becomes coordinated, which means that news can generate business cycle fluctuations. Empirical evidence suggests that news about future productivity is an important driver of macroeconomic fluctuations. There are two approaches to identify news shocks. The first is an indirect approach, which treats news as unobserved. Beaudry and Portier (2006), for example, exploit the fact that stock prices are a fast-moving variables, which readily incorporate information about future fundamentals immediately. They examine the joint behavior of total factor productivity (TFP) and stock prices. Looking at the correlation between the innovations that drive long-run movements in TFP and the innovations that are contemporaneously orthogonal to TFP, they find that these two are highly collinear. This suggests that news about future TFP is incorporated into expectations prior to the realization of the change in TFP
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