An Equilibrium Theory of the Business Cycle Under Certainty

This paper develops a full-employment theory of the business cycle in the context of a simple equilibrium dynamic monetary model with complete information, overlapping generations and production processes. This theory is founded on three basic notions: (a) economic agents plan to limit their own freedom of action; (b) it takes time to produce one unit of output; (c) the productive input can be employed on alternative discrete overlapping production processes at each point in time. According to this theory, fully anticipated monetary shocks cause the kind of movements in outputs, prices and nominal incomes, which are known as the business cycle