Cormun, Vito and Ristolainen, Kim (2026) Exchange Rate Narratives. Forthcoming in the Journal of International Money and Finance. Available as an open-access article at https://doi.org/10.1016/j.jimonfin.2026.103627.
Abstract
We combine Wall Street Journal news, topic modeling, and generative AI to extract economic narratives associated with U.S. dollar fluctuations. Using data since the late 1970s, we isolate six narratives spanning fiscal and monetary policy, financial markets, geopolitical tensions, and technological change. Adding these narratives to standard exchange rate regressions substantially improves the explanatory power of macroeconomic aggregates. The narratives are consistent with shifts in investor attention across exchange rate drivers—a mechanism that generates time-varying loadings on macroeconomic aggregates and helps account for the exchange rate disconnect puzzle.
