Working Paper
Two pitfalls of linearization methods
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);
Access Documents
File(s): File format is text/html http://www.federalreserve.gov/pubs/feds/2007/200764/200764abs.html
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2007/200764/200764pap.pdf
Authors
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2007
Number: 2007-64