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Did Sunspot Forces Cause the Great Depression?

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Author Info
Harrison, Sharon G
Weder, Mark

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3267.

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Date of creation: Mar 2002
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Handle: RePEc:cpr:ceprdp:3267

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Related research
Keywords: dynamic general equilibrium; great depression; sunspots;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
N12 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - U.S.; Canada: 1913-

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier. [Downloadable!] (restricted)
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  3. Russell Cooper & Joao Ejarque, 1995. "Financial Intermediation and The Great Depression: A Multiple Equilibrium Interpretation," NBER Working Papers 5130, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Michael Woodford, 1990. "Self-Fulfilling Expectations and Fluctuations in Aggregate Demand," NBER Working Papers 3361, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. J. Bradford De Long & Lawrence H. Summers, 1986. "The Changing Cyclical Variability of Economic Activity in the United States," NBER Working Papers 1450, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
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  12. Lee E. Ohanian, 2001. "Why Did Productivity Fall So Much during the Great Depression?," American Economic Review, American Economic Association, vol. 91(2), pages 34-38, May. [Downloadable!] (restricted)
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  13. Cooper, Russell & Ejarque, Joao, 1995. "Financial intermediation and the Great Depression: a multiple equilibrium interpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 285-323, December. [Downloadable!] (restricted)
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  20. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June. [Downloadable!] (restricted)
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  21. Michael D. Bordo & Christopher J. Erceg & Charles L. Evans, 2000. "Money, Sticky Wages, and the Great Depression," American Economic Review, American Economic Association, vol. 90(5), pages 1447-1463, December. [Downloadable!] (restricted)
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  22. Harold L. Cole & Lee E. Ohanian, 2001. "New Deal policies and the persistence of the Great Depression: a general equilibrium analysis," Working Papers 597, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  23. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24. [Downloadable!]
  24. Bernanke, Ben S & Parkinson, Martin L, 1991. "Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 439-59, June. [Downloadable!] (restricted)
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  25. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July. [Downloadable!] (restricted)
  26. Chauvet, Marcelle & Guo, Jang-Ting, 2003. "Sunspots, Animal Spirits, And Economic Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 7(01), pages 140-169, February. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sharon Harrison & Mark Weder, 2009. "Technological Change and the Roaring Twenties: A Neoclassical Perspective," Working Papers 0902, Barnard College, Department of Economics. [Downloadable!]
    Other versions:
  2. Weder, Mark, 2004. "A Heliocentric Journey into Germany's Great Depression," CEPR Discussion Papers 4191, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Smith, Ron & Zoega, Gylfi, 2008. "Global Factors, Unemployment Adjustment and the Natural Rate," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(22), pages 1-29. [Downloadable!]
  4. Fabien Tripier, 2009. "Elasticity of factor substitution and the rise in labor's share of income during the Great Depression," Working Papers hal-00419343_v1, HAL. [Downloadable!]
  5. Xiao, Wei, 2003. "Explaining speculative expansions," Working Papers 2003-02, University of New Orleans, Department of Economics and Finance. [Downloadable!]
    Other versions:
  6. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," NBER Working Papers 10255, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Weder, Mark, 2001. "The Great Demand Depression," CEPR Discussion Papers 3067, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Wen, Yi, 2002. "What Does It Take to Explain Procyclical Productivity," Working Papers 02-14, Cornell University, Center for Analytic Economics. [Downloadable!]
  9. Gauti B. Eggertsson, 2005. "Great expectations and the end of the depression," Staff Reports 234, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  10. Ron Smith & Gylfi Zoega, 2007. "Global Factors, Unemployment Adjustment and the Natural Rate," Kiel Working Papers 1367, Kiel Institute for the World Economy. [Downloadable!]
  11. Christopher P. Reicher, 2009. "Expectations, Monetary Policy, and Labor Markets: Lessons from the Great Depression," Kiel Working Papers 1543, Kiel Institute for the World Economy. [Downloadable!]
  12. Mark Weder, 2004. " The Role of Preference Shocks and Capital Utilization in the Great Depression," CDMA Working Paper Series 0405, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
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  13. Ernst Juerg Weber, 2007. "The Role of the Real Interest Rate in US Macroeconomic History," Economics Discussion / Working Papers 07-01, The University of Western Australia, Department of Economics. [Downloadable!]
  14. Duffy, John & Xiao, Wei, 2003. "Instability of sunspot equilibria in real business cycles under adaptive learning," Working Papers 2003-03, University of New Orleans, Department of Economics and Finance. [Downloadable!]
  15. Tarek Coury & Yi Wen, 2007. "Global indeterminacy in locally determinate RBC models," Working Papers 2007-029, Federal Reserve Bank of St. Louis. [Downloadable!]
  16. Pengfei Wang & Yi Wen, 2007. "Imperfect competition and indeterminacy of aggregate output," Working Papers 2006-017, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
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