Two Pitfalls of Linearization Methods
15 Pages Posted: 16 Jul 2008
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Marvin Goodfriend and Robert G. King
-
By Aubhik Khan, Robert G. King, ...
-
By Aubhik Khan, Robert G. King, ...
-
By Aubhik Khan, Robert G. King, ...