Did Sunspot Forces Cause the Great Depression?
33 Pages Posted: 16 Apr 2002
Date Written: March 2002
Abstract
We apply a dynamic general equilibrium model to the period of the Great Depression. In particular, we examine a modification of the real business cycle model in which the possibility of indeterminacy of equilibria arises. In other words, agents' self-fulfilling expectations can serve as a primary impulse behind fluctuations. We find that the model, driven only by these measured sunspot shocks, can explain well the entire Depression era; that is, the decline from 1929-32, the subsequent slow recovery and the recession that occurred in 1937-38.
Keywords: Great Depression, sunspots, dynamic general equilibrium
JEL Classification: E32, N12
Suggested Citation: Suggested Citation
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