What role does news media play in the economy?

2022-01-11

The paper Sectoral Media Focus and Aggregate Fluctuations is
published in The American Economic Review
Authors: Ryan Chahrour, Kristoffer Nimark and Stefan Pitschner

News media coverage on newsworthy but unrepresentative sectors can be an independent source of business cycle fluctuations, even if the information conveyed is accurate.
Fluctuations are generated because firms across all sectors of the economy make hiring and production decisions based on the news media coverage.
New research shows that the fall in employment and GDP observed during the recession in 2009 can largely be explained by news media covering almost exclusively the crisis-hit sectors at the expense of developments in sectors that were doing relatively well.

The figure shows that the results of news media reporting may be
a greater variation in GDP (solid line) than would otherwise be the
case (dotted line).

On any given day, news media report what they deem most important. This type of news selection can affect unemployment and economic growth. Even if the reported information is truthful, systematic reporting decisions can make companies more or less optimistic than they otherwise would be. This can then affect how many employees they hire, and how much they decide to produce.

Researchers have now developed a theoretical model that makes it possible to understand the various mechanisms and have used this model to analyse the economic variations that characterized the so-called Great Recession of 2008- 2009. During the crisis, the news media focused mainly on a few sectors that experienced difficulties such as the auto sector and financial industry. Although other industries did not experience the same difficulties at all, the reporting made companies too pessimistic, which probably exacerbated the crisis.

The model shows the role that the media can play in the economy and, thus, the importance of decision makers and others compensating for this in various ways in order to give companies a more accurate picture of the economic situation.

DOI: 10.1257/aer.20191895