Financial intermediation and the Great Depression: a multiple equilibrium interpretation

The behavior of the US economy during the interwar period is explored from the perspective of a model in which the existence of nonconvexities in the intermediation process gives rise to a multiplicity of equilibria. The resulting indeterminacy is resolved through a sunspot process which leads to endogenous fluctuations in aggregate economic activity. From this perspective, the Depression period is represented as a regime shift associated with a financial crisis. Contrary to observation, the model predicts a negative correlation of consumption and investment as well as a highly volatile capital stock.