Can media hype fuel a recession?

What is it about?

A consumer reads an article in a major U.S. newspaper warning of an oncoming economic down-turn. Uncertain about the future and worried about her job security, she postpones purchasing a new car until the next year. At a local car dealership, a sales manager reads the same article. Now pessimistic about consumer demand, she delays the planned hiring of new workers. In taking these actions, both agents have made it more likely that the very recession they fear will come to pass. This study examines data on media consumption and asks: could bad economic news be a self-fulfilling prophecy?

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Photo by Markus Spiske on Unsplash

Photo by Markus Spiske on Unsplash

Why is it important?

This study is connected to a deeper question within economics about whether psychology and irrationality play a significant role in driving the economy. The economist John Maynard Keynes famously suggested that the stock market could be driven by "animal spirits", and the role that these forces play in shaping the economy has been controversial ever since. The effects of the media described in the paper support Keynes' idea that these behavioral or psychological factors can't be ignored, even at the macroeconomic level.