Two pitfalls of linearization methods

Jinill Kim; Sunghyun Henry Kim

doi:10.1111/j.1538-4616.2007.00055.x

Two pitfalls of linearization methods

Jinill Kim, Sunghyun Henry Kim

Research output: Contribution to journal › Short survey › peer-review

11 Citations (Scopus)

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.

Original language	English
Pages (from-to)	995-1001
Number of pages	7
Journal	Journal of Money, Credit and Banking
Volume	39
Issue number	4
DOIs	https://doi.org/10.1111/j.1538-4616.2007.00055.x
Publication status	Published - 2007 Jun
Externally published	Yes

Keywords

Linear-quadratic method
Linearization
Second-order approximation
Welfare

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

Access to Document

10.1111/j.1538-4616.2007.00055.x

Cite this

@article{755804fc2f4e4ee8ba8415057d226696,

title = "Two pitfalls of linearization methods",

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.",

keywords = "Linear-quadratic method, Linearization, Second-order approximation, Welfare",

author = "Jinill Kim and Kim, {Sunghyun Henry}",

year = "2007",

month = jun,

doi = "10.1111/j.1538-4616.2007.00055.x",

language = "English",

volume = "39",

pages = "995--1001",

journal = "Journal of Money, Credit and Banking",

issn = "0022-2879",

publisher = "Wiley-Blackwell",

number = "4",

}

TY - JOUR

T1 - Two pitfalls of linearization methods

AU - Kim, Jinill

AU - Kim, Sunghyun Henry

PY - 2007/6

Y1 - 2007/6

N2 - 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.

AB - 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.

KW - Linear-quadratic method

KW - Linearization

KW - Second-order approximation

KW - Welfare

UR - http://www.scopus.com/inward/record.url?scp=34250166185&partnerID=8YFLogxK

U2 - 10.1111/j.1538-4616.2007.00055.x

DO - 10.1111/j.1538-4616.2007.00055.x

M3 - Short survey

AN - SCOPUS:34250166185

SN - 0022-2879

VL - 39

SP - 995

EP - 1001

JO - Journal of Money, Credit and Banking

JF - Journal of Money, Credit and Banking

IS - 4

ER -

Two pitfalls of linearization methods

Abstract

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Cite this