## How Animal Spirits Affect the Economy

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**Canonical URL:** [How Animal Spirits Affect the Economy](https://www.imf.org/-/media/files/publications/fandd/article/2025/03/sastry.pdf)

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### Main findings
- Companies with optimistic narratives increase hiring by 2.6 percentage points more in a year than comparable companies with pessimistic language.
- Firms with optimistic narratives do not see higher stock returns or profitability in the future and make overoptimistic forecasts to investors.
- Using a macroeconomic model calibrated to empirical measurements, narratives explain about 20 percent of fluctuations in the US business cycle since 1995.
- Narratives explain about 32 percent of the early 2000s recession and 18 percent of the Great Recession of 2008–09.
- Individual, granular narratives (for example, around new technologies) are more volatile and more likely to go viral than aggregate mood, which fluctuates slowly around a long-term average.

### Measurement and methods
- Data sources: text of US public firms’ conference calls and Form 10-K filings.
- Natural language processing techniques: dictionary-based keyword/phrase scans and more complex algorithmic topic-discovery methods.
- Identified narrative topics include firms’ general optimism about the future, excitement about artificial intelligence, and adoption of new digital marketing techniques.
- These textual measures are used to empirically model how narratives drive firms’ decisions and how stories spread in the US economy.

### Firm-level effects and behavioral interpretation
- Optimistic narratives are associated with accelerated hiring and capital investment beyond what is predicted by productivity or recent financial success.
- Optimistic and pessimistic narratives display hallmarks of Keynes’s “animal spirits”: emotionally based forces that drive managers to expand or shrink businesses independent of fundamentals.
- Firms tend to adopt the narratives of their peers; narrative contagion appears to begin within industry peer groups and then spread to the aggregate level.
- Narratives that originate at large companies have an especially large effect, suggesting large firms may act as thought leaders in the narrative economy.

### Narrative contagion and macroeconomic impact
- Contagious narratives can draw out economic fluctuations: a one-time shock can have long-lasting effects because a negative (or positive) mood infects the population and holds back (or boosts) business activity.
- Sufficiently contagious narratives that cross a virality threshold can induce narrative hysteresis, where one-time shocks move the economy into stable self-fulfilling periods of optimism or pessimism via feedback loops between economic performance and narrative reinforcement.
- A constellation of fast-moving fears and fads contributes to relatively stable aggregate economic sentiment by producing frequent, granular narrative shocks.

### Policy implications and research directions
- What people say is informative about individual attitudes and broader economic trends; public regulatory filings and earnings calls contain valuable information that can be mined with improved machine learning and data-processing tools.
- The rise of novel surveys that allow households or businesses to explain the “why” behind attitudes and decisions may increase in value given data science advances.
- Some narratives are more influential and contagious than others; it is important to combine descriptive measurement of narratives with empirical analysis of their effects on decisions and spread.
- Policy narratives matter: policymakers’ statements can become powerful stories, but more research is needed into what makes a policy narrative particularly compelling (for example, why Mario Draghi’s unscripted “whatever it takes” remarks resonated more than similar statements by others).
- Further academic and policy research should aim to identify which narratives are most contagious, how they interact with economic events, and how measurement can better quantify narratives’ contributions to the business cycle.

*Source: Joel Flynn and Karthik Sastry, March 2025, F&D.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/03/sastry.pdf_