Macro Seminar - Rustam Jamilov (Oxford)

Abstract: We propose an empirically-consistent theory of business cycles that are driven by sentiment of a small number of agents. We measure firm-level sentiment with simple methods from computational linguistics and find that 50 firms explain an important share of movements in aggregate confidence and the economy. The “granular sentiment residual” is dominated by firms that are closer to the final consumer, i.e. are more downstream. Downstreamness-weighted average sentiment of the 50 most informative firms explains 70% of the unconditional variation in U.S. output over 2006-2021. To rationalize our empirical findings, we embed endogenous information acquisition into a general equilibrium model with heterogeneous upstream and downstream firms.  We show that it is generally optimal to pay more attention to downstream firms, who effectively act as “information aggregators”. When calibrated to match select moments of U.S. data, granular sentiment shocks by themselves explain a significant faction of the business cycle. This paper thus attempts to merge two long-standing ideas in macroeconomic research: the granular hypothesis and animal-spirits-driven fluctuations.