Calculating short-run adjustments: sensitivity to non-linearities in a representative agent framework

Title: Calculating short-run adjustments: sensitivity to non-linearities in a representative agent framework
Creator: Stemp, Peter J.; Herbert, Ric D.
Relation: Journal of Economic Dynamics & Control Vol. 27, Issue 3, p. 357-379
Publisher Link: http://dx.doi.org/10.1016/S0165-1889(01)00029-X
Publisher: Elsevier Science B.V.
Resource Type: journal article
Date: 2003
Description: Two common properties of macroeconomic models are non-linearities and dynamics characterised by a non-zero number of unstable eigenvalues. Under these circumstances, a common approach is to make analysis more tractable by linearising the model in the neighbourhood of an appropriate steady state. The linearised model is then employed to calculate short-run adjustments following exogenous shocks. This can lead to different results than would be derived from the correct (non-linear) model. This paper investigates the magnitude of errors that come about as a consequence of using a linear approximation to a well-known representative agent model. This is achieved by taking a calibrated version of the Matsuyama [J. Int. Econom. 23 (1987) 299] model of a small open economy.
Subject: non-linear models; linear approximation; macroeconomics; short-run adjustments; approximation errors
Identifier: uon:1580
Identifier: http://hdl.handle.net/1959.13/27342
Identifier: ISSN:0165-1889
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