Economic Quarterly

Winter 2003

Potential Consequences of Linear Approximation in Economics

Alexander L. Wolman and Elise A. Couper

Linear approximation is a popular tool for studying the properties of dynamic economic models. Advocates of linearization have always acknowledged and emphasized that it may be inaccurate unless the researcher restricts attention to small deviations from a steady state. Recent work has highlighted another risk attaching to linearization: the approximation may yield erroneous results about the existence and uniqueness of equilibrium.

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