How Well Do Linear Approximation Methods Work? Results for Suboptimal Dynamic Equilibria

44 Pages Posted: 3 Nov 2012

See all articles by Michael Dotsey

Michael Dotsey

Federal Reserve Bank of Philadelphia

Ching-Sheng Mao

National Taiwan University - Department of Economics

Date Written: November 1, 1990

Abstract

Real business cycle models have recently been applied to settings in which equilibria are suboptimal. In most models the solutions are approximated using some type of linearization with little attention being given to the accuracy of the approximation. In this paper we investigate three different approximation methods in the context of a neoclassical model with a production tax and compare their solutions with solutions obtained from a discrete state space solution to the Euler equations of the model.

Suggested Citation

Dotsey, Michael and Mao, Ching-Sheng, How Well Do Linear Approximation Methods Work? Results for Suboptimal Dynamic Equilibria (November 1, 1990). Federal Reserve Bank of Richmond Working Paper No. 90-11, Available at SSRN: https://ssrn.com/abstract=2123592 or http://dx.doi.org/10.2139/ssrn.2123592

Michael Dotsey (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
804-697-8201 (Phone)
804-697-8255 (Fax)

Ching-Sheng Mao

National Taiwan University - Department of Economics ( email )

21 Hsiu Chow Rd
Taipei, 10020
Taiwan

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