Did Sunspot Cause the Great Depression?

Abstract

We apply a dynamic general equilibrium model to the period of the Great Depression. In particular, we examine a modi¯cation of the real business cycle model in which the possibility of indeterminacy of equilibria arises. In other words, agents' self-ful¯lling expectations can serve as a primary impulse behind °uctuations. We find that the model, driven only by these measured sunspot shocks, can explain well the entire Depression era. That is, the decline from 1929-1932, the subsequent slow recovery, and the recession that occurred in 1937-1938.