Monetary Policy in the Media Spotlight: Sentiments, Signals, and Economic Impact

TL;DR

This paper investigates how media sentiment influences monetary policy and macroeconomic outcomes, using a novel sentiment index derived from Canadian newspapers and embedding it into a behavioral macroeconomic model.

Contribution

It introduces a new media sentiment indicator and demonstrates its significant role in monetary policy transmission and macroeconomic fluctuations.

Findings

Media sentiment affects household inflation and wage expectations.

Sentiment improves forecasts of GDP growth and inflation.

Media sentiment contributes to macroeconomic variance and policy transmission.

Abstract

News media coverage of monetary policy is not a passive transcript of central-bank communication: it filters announcements, macroeconomic news, and editorial choices into narratives that move expectations and policy decisions. We embed media sentiment into a behavioral New-Keynesian model in which the central bank reacts to sentiment and sentiment follows an explicit law of motion. We construct monetary-policy sentiment indicators from more than 50,000 Canadian newspaper articles using dictionary methods, transformer models, and a generative-AI framework. Media sentiment shifts household inflation and wage expectations, improves out-of-sample forecasts of GDP growth and inflation, and loads positively on the Bank of Canada's estimated Taylor rule once treated as endogenous. A Bayesian SVAR identifies anticipated and unanticipated monetary-policy shocks together with a narrative shock; the narrative shock contributes a non-trivial share of medium-horizon macroeconomic variance, and a counterfactual that shuts down the dynamic feedback from media sentiment attenuates the propagation of monetary policy to output and prices. %The results suggest that media narratives are an integral part of monetary-policy transmission, not merely an additional source of information.