Comparative statics and sign indeterminacy in a simple neoclassical macroeconomic model.

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Abstract

In this paper, we analyse a simple two-period neoclassical macroeconomic model -short and long term- that exclusively considers the real sector of the economy (labour and goods markets). It is shown how, under a general characterization, some important signs of comparative statics are undetermined. This ambiguity is a consequence of the ubiquity of the real interest rate tying intertemporally the four markets considered. By imposing simplifying assumptions, the signs are determined at the cost of losing both generality and empirical adequacy. This fact limits the empirical relevance of a large part of the models commonly used in teaching macroeconomics, where ambivalent results are avoided because of the need of clear answers on the effects of fiscal and monetary policy interventions. Taking a positive view, these results compels to take general interdependence seriously and to pay more attention to the complete set of theoretical possibilities that arise when modelling macroeconomic systems.