The value of X, formerly known as Twitter, as a business remains dubious. But its value to the economy is a different story altogether
is no fan of the Federal Reserve. At least a dozen times over the past year the owner of X has savaged America’s central bank for. Last December, for instance, he tweeted that its hikes might go down as the “most damaging ever”. But Mr Musk’s disdain for the Fed is not mirrored by the Fed’s attitude towards X. On the contrary, the central bank’s researchers rather like the website, treating it as a compelling barometer of the economy.
There is a large, growing literature on how to decode economic signals from social-media sites, ranging from Facebook to Reddit. Yet even in the sea of online information and commentary, Mr Musk’s stands out. Others simply cannot match its volume and frequency. By 2013 Twitter users were already producing more than 5,700 posts in a second. By 2016 Instagram’s larger user base was producing only 1,000. Three papers recently published by the Fed explore the platform’s economic contributions.
The index, they find, correlates tightly with corporate-bond spreads . More than merely shadowing financial movements, posts can even foreshadow them. The overnight index before the stockmarket’s open dovetails with the coming day’s equity returns. A separate paper by Clara Vega and colleagues finds that the website’s sentiment also closely tracks Treasury yields. Indeed, the correlation is stronger with tweets than with sentiment measures gleaned from the Fed’s own official communications.
The Fed papers also see a third use for tweets: as a bellwether of sorts for monetary policy. Ms Vega and colleagues find that the social-media site fares better than changes in bond yields in predicting monetary-policy decisions on the day of their announcement. The Twitter sentiment index, meanwhile, is good at anticipating shocks from tighter policy such as rate increases. Tweets tend to turn sour just ahead of these moves.
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