Working Paper: CEPR ID: DP3267
Authors: Sharon G. Harrison; Mark Weder
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: dynamic general equilibrium; Great Depression; sunspots
JEL Codes: E32; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonfundamental confidence (sunspot shocks) (E32) | economic downturn (F44) |
| decline in confidence (E32) | economic downturn (F44) |
| initial recession (1929-1930) (F44) | decline in confidence (E32) |
| decline in confidence (from 1930) (E32) | prolonged depression (E71) |
| nonfundamental confidence (interest rate spread) (E43) | output growth (O40) |
| output growth (O40) | economic activity (E20) |
| economic downturn (F44) | slow recovery (O56) |
| economic downturn (1937-1938) (F44) | output growth (O40) |