Do Sunspots Produce Business Cycles?

I compare the canonical sunspots and real business cycle models of aggregate fluctuations. The sunspots model, distinguished by production externalities, is better able to reproduce the typical spectral shape of growth rates found in the data. However, it generates excessive investment volatility and overstates high frequency behavior in employment, investment and output series. The introduction of adjustment costs, in conjunction with separate externality parameters to capital and labor inputs, can reduce these weaknesses substantially, though this may require the assumption of an implausible level of increasing returns.