Exchange Rate Narratives
Vito Cormun and Kim Ristolainen
Abstract
Leveraging Wall Street Journal news, recent developments in textual analysis, and generative
AI, we estimate a narrative decomposition of the dollar exchange rate. Our findings
shed light on the connection between economic fundamentals and the exchange rate, as
well as on its absence. From the late 1970s onwards, we identify six distinct narratives
that explain changes in the exchange rate, each largely non-overlapping. U.S. fiscal and
monetary policies play a significant role in the early part of the sample, while financial
market news becomes more dominant in the second half. Notably, news on technological
change predicts the exchange rate throughout the entire sample period. Finally, using
text-augmented regressions, we find evidence that media coverage explains the unstable
relationship between exchange rates and macroeconomic indicators.