U.S.A.

We apply a dynamic general equilibrium model to the period of the U.S. Roaring Twenties. In particular, we examine a modification of the real busi-ness cycle (RBC) model in which the possibility of indeterminacy of equilibria arises. In other words, in addition to technology shocks, agents ’ self-fulfilling expectations can serve as a primary impulse behind fluctuations. We estimate both shocks using U.S. data. The sunspot, or belief shock, is calculated us-ing asset returns. We then examine the behaviors of output and consumption when fluctuations are driven by either or both shocks. We find that the model economy in which only sunspot shocks matter best describes the 1920s.