Monetary Policy in the Age of Social Media: A Twitter-Based Inflation Analysis

In today's digital age, social media platforms like Twitter have become more than just a space for sharing personal updates and memes. They've transformed into a goldmine of data, offering insights into various aspects of society, including economic trends. Our new study has tapped into this potential, unveiling a high-frequency inflation index derived from German tweets. This isn't just any index; it's a sophisticated tool developed using advanced Natural Language Processing (NLP) methods. But what makes it so special? Let's dive in.

A Tweet's Worth in Gold

The Twitter-centric inflation index isn't just a fancy number (see Figure 1). It aligns closely with both realized inflation and consumer inflation expectations. Whether you're looking at it from a national or regional perspective, its accuracy is commendable, even surpassing current benchmarks.

Figure 1: Twitter-based inflation index (Jan 2007 - May 2023)

The Pulse of Monetary Policy

Monetary policy, the strategy employed by central banks to control the money supply, has always had a profound impact on inflation. What's fascinating about this Twitter-based index is its responsiveness to these policy shifts. When there's an easing in the policy, the index rises, and when there's an unexpected tightening, it falls.

But here's the kicker: the influence of these tweets is especially pronounced from private users during times of high inflation. This means that the everyday individual, sharing their thoughts and concerns on Twitter, can provide valuable insights into the state of the economy.

The Ripple Effect on Consumer Spending

It's no secret that inflation expectations can influence consumer behavior. The study found a direct correlation between elevated inflation expectations (as gauged from the tweets) and a reduction in consumer spending. This was particularly evident in online transaction data related to discretionary goods. In simple terms, when people expect prices to rise, they're less likely to splurge on non-essential items.

Why This Matters

In a world where real-time data is crucial, this Twitter-centric index is a game-changer. It offers policymakers, economists, and businesses a real-time tool to gauge prevailing inflation sentiments. By understanding these sentiments, they can make informed decisions that could potentially steer the economy in the right direction.

In Conclusion

The digital age has brought with it a plethora of opportunities. The ability to derive meaningful economic insights from platforms like Twitter is just the tip of the iceberg. As technology and NLP methods continue to evolve, who knows what other gems we'll uncover from our tweets? For now, though, it's clear that 280 characters can indeed offer a wealth of knowledge about the state of the economy.

The Authors

Benjamin Born, Hrishbh Dalal, Nora Lamersdorf and Sascha Steffen

We provide the index and updated material here.

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