How Well Do Linear Approximation Methods Work? Results for Suboptimal Dynamic Equilibria
44 Pages Posted: 3 Nov 2012
Date Written: November 1, 1990
Abstract
Real business cycle models have recently been applied to settings in which equilibria are suboptimal. In most models the solutions are approximated using some type of linearization with little attention being given to the accuracy of the approximation. In this paper we investigate three different approximation methods in the context of a neoclassical model with a production tax and compare their solutions with solutions obtained from a discrete state space solution to the Euler equations of the model.
Suggested Citation: Suggested Citation
Dotsey, Michael and Mao, Ching-Sheng, How Well Do Linear Approximation Methods Work? Results for Suboptimal Dynamic Equilibria (November 1, 1990). Federal Reserve Bank of Richmond Working Paper No. 90-11, Available at SSRN: https://ssrn.com/abstract=2123592 or http://dx.doi.org/10.2139/ssrn.2123592
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