What do Economic Agents Know?

– David Tuckett –

Can we develop a reliable way to assess how the role of changing narratives influences the macroeconomy? Can we detect changes in narratives and estimate their effects? More broadly, can we open-up a new data source for macroeconomics? Our pilot project, funded by the Rebuilding Macroeconomics Network, will investigate narratives as a source of information, and how they can improve policymakers’ understanding of the macroeconomy.

We are a team of interdisciplinary researchers, comprising two anthropologists (Laura Bear and Douglas Holmes), a sociologist-psychoanalyst (David Tuckett) and an economist and former member of the Bank of England’s Monetary Policy Committee (Sir Tim Besley). We are very grateful to have been granted access by the Bank of England to carry out this study.

There is little more fundamental to our humanity than story-telling. Story-telling emerges early in development, is cross-culturally universal, and goes as far back (at least) as mankind itself. Stories shape our cognition and our life as social animals. We use them to communicate, rationalise and coordinate our actions. They pervade our memories and imaginations of the future, and even form the backbone of who we are. Above all, they allow us to make sense of, and feel, the outcomes of what is happening.

Our project seeks to examine how narratives, as a form of economic “knowledge”, drive the macroeconomy. We aim to uncover and identify stories circulating in the economy. Can knowledge of those stories, and how they are changing, viewed through the lens of narrative economics, tell us what is happening in the economy beyond the usual statistics? Could this allow policymakers to assess their models and fine-tune the effect of their interventions?

We begin by hypothesising that fundamentals are not known ‘just by themselves’ but through a process of construction. The narratives people construct are, then, the foundation of knowledge about the economy. Sometimes they differ or seriously conflict, and sometimes they become highly uniform. They are also certainly reflexive – that is influenced by, and able to influence, economic action in a dynamic interaction.

Starting this month we will set out to discover narratives circulating in Britain by talking to members of the Bank of England’s team of agents. They are the human ‘eyes and ears’ of the Bank, who live in their regions across the UK, establish relationships and keep their fingers on the economic pulse. They collect both quantitative and qualitative data from over 9,000 firms and other organisations about their current experience and expectations of economic activity. They then pool their data at regular meetings and report to officials and the Monetary Policy Committee, who use this information in their discussions along with the more formal data from the Bank’s models.

Our first objective is to look at how the agents pick up the stories in the economy and how far, and under what circumstances, these stories get traction in the policy process. We will examine whether the agents observe trends, or provide additional information, that is not present in other sources. We can see whether we, coming from our diverse backgrounds, can suggest additional ways to gather and collect data. It may be valuable to suggest a fuller or differently focused analysis of the agent’s narratives to provide earlier information.

Central bank policy across the globe uses some form of forward guidance. Essentially, this already assumes that narratives matter and that trying to transmit and influence future expectations is an effective channel. But what do firms and organisations really make of it? How does the bank’s information coming from members of the MPC really influence the narratives, calculations and actions of private economic agents?

We suggest that narratives are the main source of the knowledge that economic agents develop to cope with, and make sense of radical uncertainty about what is and what will happen in the economy. Our project covers the period when the UK leaves the European Union. This may mean some significant changes in narratives about what the economic consequence might be.

By exploring such questions, we hope to use our study to make more precise statements about the role of narratives in understanding and co-ordinating the macroeconomy. In addition, we will investigate how narratives can influence, and indeed be influenced by, changes in monetary policy

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07 June 2018