RDP 2020-08: Start Spreading the News: News Sentiment and Economic Activity in Australia 8. Conclusion and Directions for Future Research

We construct a news sentiment index and find that it is useful both to understand the current state of the economy and to help explain economic conditions in the near term. Some related indicators, such as the news uncertainty index, are also useful real-time indicators of the economy.

We also present novel estimates of monetary policy-related news sentiment, which can predict changes in the cash rate even after accounting for the RBA's forecasts for the economy. This suggests that the news contains useful information about the risks to the economic outlook to which the RBA is responding when setting interest rates. We conduct an event study in the days around monetary policy announcements and find evidence that increases (decreases) in interest rates are associated with weaker (stronger) news sentiment. These results are consistent with monetary policy having its intended effects and we find no evidence of any counterproductive effects of monetary policy on news sentiment.

This paper focuses on the ability of the news sentiment indicators to explain high-frequency indicators of economic activity. We do not find any evidence that fluctuations in news sentiment explain economic activity at a longer frequency, such as quarterly measures of GDP growth and consumer price inflation. It may be worth looking at this more closely in future given the relative importance that policymakers place on these specific measures of activity. Relatedly, we have applied a very simple text analysis method in constructing our preferred news sentiment indicators. It may be worth looking at more sophisticated machine learning measures in future research (e.g. Bybee et al 2020).

Finally, we are unable to clearly disentangle the effects of shocks to news (fundamentals) from those of sentiment or ‘animal spirits’ (non-fundamentals) on the economy. Future research may be able to separate these two shocks through different types of news articles. For example, the language used in editorials and opinion articles is plausibly more associated with changes in sentiment and the language used in standard news reports may be more associated with changes in fundamentals.