‘Whatever it takes’ to change belief: evidence from Twitter

The sovereign debt literature suggests the possibility that a self-fulfilling default crisis might be avoided if markets believe the central bank will act as lender of last resort. This paper investigates the extent to which changes in belief about an intervention of the European Central Bank (ECB) explain the sudden reduction of government bond spreads for the distressed countries in summer 2012. The authors study Twitter data and extract belief using machine learning techniques. They find evidence of strong increases in the perceived likelihood of ECB intervention and show that those increases explain subsequent decreases in the bond spreads of the distressed countries.