Enhancing macroeconomic forecasts with alternative data
When expectations for headline economic indicators are off-beat, economists sometimes point to the Keynesian notion of ‘animal spirits’ as the cause of error. Animal spirits can be loosely defined as the emotional and psychological drivers of economic decision making, that commonly diverge from models of rational, self-optimizing behaviors. But what if we could quantify and measure the animal spirits in headline indicators? Would it make forecasts for growth and inflation more accurate?
In this literature review, we summarize key findings from the paper, Macroeconomic forecasting through news, emotions and narrative by Tillya, Ebnerb and Livana, published in September 2020.