Free indirect discourse is a writing technique often employed when an author uses third-person limited narration. For the best explanation, I offer three examples (shamelessly gleamed from an AP English handout):

Indirect discourse:She thought she would stay there the next day.

Direct discourse:She thought, "I will stay here tomorrow."

Free indirect discourse:She would stay here tomorrow.

The point of free indirect discourse is to make the third-person narrator's voice take on the qualities of the character he/she is speaking about. The narrator becomes less detached, and his/her emotions more ambiguous, as the author switches between the three styles of narration.

Some examples of authors that use free indirect discourse:

Gustave Flaubert, Madame Bovary
Ernest Hemingway, "A Clean, Well-Lighted Place"
Stephen Crane, The Red Badge of Courage

These writers are all realists (except, possibly, Hemingway) and from what I've read free indirect discourse seems to be a favorite style of that particular group. Because their works dealt with characters and emotions, rather than outrageous plots (unlike the Romantics, who the entire realist movement seems to be a reaction against), this narration style allows the author to maintain his/her third-person voice while relating the emotions of the character.

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