Potential Consequences of Linear Approximation in Economics

FRB Richmond Economic Quarterly, Vol. 89, No. 1, Winter 2003, pp. 51-67

17 Pages Posted: 5 Dec 2012

Date Written: 2003

Abstract

Linear approximation is a popular tool for studying the properties of dynamic economic models. Advocates of linearization have always acknowledged and emphasized that it may be inaccurate unless the researcher restricts attention to small deviations from a steady state. Recent work has highlighted another risk attaching to linearization: the approximation may yield erroneous results about the existence and uniqueness of equilibrium.

Suggested Citation

Wolman, Alexander L. and Couper, Elise, Potential Consequences of Linear Approximation in Economics (2003). FRB Richmond Economic Quarterly, Vol. 89, No. 1, Winter 2003, pp. 51-67. Available at SSRN: https://ssrn.com/abstract=2184942

Alexander L. Wolman (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Elise Couper

Independent

No Address Available
United States

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