I think both are happening. Basically internal thought processes increase to an unhealthy degree as a way of compensating for the decrease in sensory perception, which is the same thing as happens in a sensory deprivation tank.
I think the initial cause of the depression can be either not enough sensory stimulation or too much thinking, as happens when there is a traumatic or very stressful event. If the latter is the root cause then you may need CBT or meditation or something like that. But in both cases using my sensory jumpstart method would work to fix a bout of depression, although it will keep recurring until you change your lifestyle (sensory as root cause case) or come to terms with whatever is stressing you, or at least learn to avoid the negative thought triggers.
I wonder if a way to test these hypotheses would be to consider situations involving the expectation of a sensory experience and look for a mismatch between that and the actual sensation. You could do this with the rubber hand illusion or immersion in a virtual reality environment. A depressed person would putatively have an abnormal congruence between the magnitude of their internally generated brain states and external sensation.