Two pitfalls of linearization methods

Jinill Kim and Sunghyun Kim ()

No 2007-64, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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: Linear; models; (Statistics) (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba
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Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Two Pitfalls of Linearization Methods (2007)
Journal Article: Two Pitfalls of Linearization Methods (2007)
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