A narrative is a popular story that arises from the public consciousness of market events. The most viral and intense of these may dominate public attention. Narratives are rooted in popular beliefs and are not necessarily from economists’ minds.
Hence, by definition, a multitude of narratives may circulate in social interactions. They may evolve overtime and some of them may be picked up by central banks. Narratives can have different natures. For example, on top of the economic narratives, we introduce also the concept of societal narratives (environmental and social) as well as a geopolitical risk narrative.
While narratives have been around for a long time, even before their economic conceptualisation by Nobel prize winning economist Robert Shiller few years ago, their impact has not been yet fully exploited.
To assess the narrative evolution, we have conducted an analysis on the evolution and impact of some pre-defined narratives using the Global Dataset of Events Language and Tone (GDELT)1, a database that “monitors the world's broadcast, print and web news from nearly every corner of every country”.
Making use of this data, we have been able to calculate daily volume and sentiment measures associated to some of the topics mentioned, which are then aggregated under themes. The combination of different themes constitutes a story. We have, therefore, defined four economic narratives that are currently in the economic spotlight. For example, the combination of macroeconomic imbalances and rising inflationary pressures, notably via the commodity price channel, has resonated with market players and echoes the 1970s.
Our analysis suggests that narratives complement traditional macro variables when it comes to explaining financial market behaviour.