Two Pitfalls of Linearization Methods

B-Tier
Journal: Journal of Money, Credit, and Banking
Year: 2007
Volume: 39
Issue: 4
Pages: 995-1001

Authors (2)

JINILL KIM (Korea University) SUNGHYUN HENRY KIM (not in RePEc)

Score contribution per author:

1.005 = (α=2.01 / 2 authors) × 1.0x B-tier

α: calibrated so average coauthorship-adjusted count equals average raw count

Abstract

This paper illustrates two types of pitfalls when linearization methods are improperly applied. First, if we linearize the constraints before deriving the optimality conditions, the derived conditions are not correct up to first order. Second, even when we obtain the behavior of the economy that is correct to the first order, applying this behavior to welfare implications may lead to incorrect results. We also review different ways to avoid those pitfalls.

Technical Details

RePEc Handle
repec:wly:jmoncb:v:39:y:2007:i:4:p:995-1001
Journal Field
Macro
Author Count
2
Added to Database
2026-01-25