Two Pitfalls of Linearization Methods

15 Pages Posted: 16 Jul 2008

See all articles by Jinill Kim

Jinill Kim

Korea University

Sunghyun Henry Kim

Sungkyunkwan University - Department of Economics

Date Written: December 2007

Abstract

This paper illustrates two types of pitfalls in using linearization methods. First, if constraints are linearized before deriving optimality conditions, the derived conditions are not correct up to first order. Second, even when the behavior of the economy is correct to the first order, applying this behavior to welfare implications may lead to incorrect results

Keywords: Linearization, linear-quadratic method, second-order approximation, welfare

JEL Classification: C6

Suggested Citation

Kim, Jinill and Kim, Sunghyun Henry, Two Pitfalls of Linearization Methods (December 2007). FEDS Working Paper No. 2007-64, Available at SSRN: https://ssrn.com/abstract=1160363 or http://dx.doi.org/10.2139/ssrn.1160363

Jinill Kim (Contact Author)

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701

Sunghyun Henry Kim

Sungkyunkwan University - Department of Economics ( email )

110-745 Seoul
Korea

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
28
Abstract Views
441
PlumX Metrics