Research Discussion Paper – RDP 2020-08 Start Spreading the News: News Sentiment and Economic Activity in Australia

In times of crisis, real-time indicators of economic activity are a critical input to timely and well-targeted policy responses. The COVID-19 pandemic is the most recent example of a crisis where events with little historical precedent played out rapidly and unpredictably. To address this need for real-time indicators we develop a new indicator of ‘news sentiment’ based on a combination of text analysis, machine learning and newspaper articles. The news sentiment index complements other timely economic indicators and has the advantage of potentially being updated on a daily basis. It captures key macroeconomic events, such as economic downturns, and typically moves ahead of survey-based measures of sentiment. Changes in sentiment expressed in monetary policy-related news can also partly explain unexpected changes in monetary policy. This suggests that news captures important, but unobserved, information about the risks to the RBA's forecasts that the RBA responds to when setting interest rates. An event study in the days around monetary policy decisions suggests that an unexpected tightening in monetary policy is associated with weaker news sentiment, though the effects on sentiment are temporary and not particularly strong.