Linearization and Higher-Order Approximations: How Good are They? Results from an Endogenous Growth Model with Public Capital

43 Pages Posted: 22 Oct 2009 Last revised: 20 May 2011

See all articles by Manoj Atolia

Manoj Atolia

Florida State University - Department of Economics

Bassam R. Awad

Central Bank of Jordan

Milton H. Marquis

Florida State University - Department of Economics

Date Written: January 1, 2010

Abstract

The standard procedure for analyzing transitional dynamics in non-linear macro models has been to employ linear approximations. Recently quadratic approximations have been explored. This paper examines the accuracy of these and higher-order approximations in an endogenous growth model with public capital, thereby extending the work done in the current literature on the neoclassical growth model. We find that significant errors may persist in computed transition paths and welfare even after resorting to approximations as high as fourth order. Moreover, the accuracy of approximations may not increase monotonically with the increase in the order of approximation. Also, as in the previous literature, we find that achieving acceptable levels of accuracy when computing the welfare consequences of a policy change typically requires a higher order approximation than attaining similar levels of accuracy in the computation of the transition path: typically an increase in order of approximation by one is sufficient.

Keywords: Linearization, higher-order approximations, endogenous growth, welfare, public and human capital

JEL Classification: O41, C61, C63

Suggested Citation

Atolia, Manoj and Awad, Bassam R. and Marquis, Milton H., Linearization and Higher-Order Approximations: How Good are They? Results from an Endogenous Growth Model with Public Capital (January 1, 2010). Computational Economics, Vol. 38, No. 1, 2011. Available at SSRN: https://ssrn.com/abstract=1492343

Manoj Atolia

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States
+1.850.644.7088 (Phone)
+1.850.644.4535 (Fax)

HOME PAGE: http://mailer.fsu.edu/~matolia/

Bassam R. Awad (Contact Author)

Central Bank of Jordan ( email )

PO. Box 37
King Hussein Street
Amman, 11118
Jordan

HOME PAGE: http://myweb.fsu.edu/bawad/

Milton H. Marquis

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

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