Quantifying Minsky cycles

We develop a novel sentiment measure from survey forecasts that captures the component of beliefs arising from the systematic misaggregation of public information relative to a machine benchmark based on the same information set. We extend this sentiment measure historically for a panel of 78 countries using machine learning models trained on BERT embeddings of historical news articles (1903-2020). The backcasted sentiment shows that shocks in median sentiment predict credit booms in the non-tradable corporate sector, which prior research has linked to financial crises. We further find that this sentiment component is shaped by memory-related dynamics, as the time elapsed since major crises and the share of young-to-old people in the population predict surges in optimism even when recent economic developments are controlled for. Taken together, the findings provide new historical evidence consistent with the Minsky-Kindleberger view on financial crises.