Two pitfalls of linearization methods

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.

MoreLess

Year of publication:	2007
Authors:	Kim, Jinill ; Kim, Sunghyun Henry
Institutions:	Federal Reserve Board (Board of Governors of the Federal Reserve System)
Subject:	Linear models (Statistics)

More details

Extent:	text/html application/pdf
Series:	Finance and Economics Discussion Series.
Type of publication:	Book / Working Paper
Language:	English
Notes:	Number 2007-64
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005393739