An Equilibrium Theory of the Business Cycle Under Certainty

Abstract

This paper develops a full�employment theory of the business cycle in the context of a simple equilib rium dynamic monetary model with complete info:r:mation, overlapping genemtioll5 and production proceaacs. Thin 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; the pro ductive input can be employed on alternative discrete overla.pping production processes at each point in time. According to this theory, fully anticipated monetary shocks caUBe the mnd of movements in outputa, prices and nominal incomes , which are well known as the business cyde. *1 would like to express my gratitude to two special friends, Professors Gercldo da Silva e Souza. and Keti Tenenblat, of the University of Bra.ru1ia. Over a. time span of two years they frequently interrupted their nonnal research and teaching activities in the fields of statistics and mathematics in order to dedicate much time and patience to discuss many aspects of thio paper with me. Without. their help, it would have been much more difficult to bring this vernian to light. I am also grateful for t�e helpful suggestions of the referees of this Journal