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
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.
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