Macroeconomic Model and the Missing Equation

Abstract

We address the missing equation difficulty of macroeconomic models, which is usually associated with the Keynesian model alone, but the “Classical” model is shown to suffer from essentially the same problem. The difficulty of the classical model is resolved by re-examining the behavioral hypothesis under uncertainty by using the Certainty Equivalence of uncertain variables. The Certainty Equivalence concept is also useful to resolve the missing equation difficulty of the Keynesian model, although production function must be simultaneously taken into account. The final section extends the analysis to the uncertainty of the future income.