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Calculating Short-Run Adjustments: Sensitivity to Non-Linearities in a Representative Agent Framework

Author

Listed:
  • Herbert, R.D.
  • Stemp, P.J.

Abstract

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 (1987) model of a small open economy.

Suggested Citation

  • Herbert, R.D. & Stemp, P.J., 1999. "Calculating Short-Run Adjustments: Sensitivity to Non-Linearities in a Representative Agent Framework," Department of Economics - Working Papers Series 706, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:706
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    References listed on IDEAS

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    1. Duncan Thomas, 1990. "Intra-Household Resource Allocation: An Inferential Approach," Journal of Human Resources, University of Wisconsin Press, pages 635-664.
    2. Benefo, Kofi & Schultz, T Paul, 1996. "Fertility and Child Mortality in Cote d'Ivoire and Ghana," World Bank Economic Review, World Bank Group, vol. 10(1), pages 123-158, January.
    3. Barrera, Albino, 1990. "The role of maternal schooling and its interaction with public health programs in child health production," Journal of Development Economics, Elsevier, vol. 32(1), pages 69-91, January.
    4. Haddad, Lawrence & Hoddinott, John, 1994. "Women's income and boy-girl anthropometric status in the Cote d'Ivoire," World Development, Elsevier, vol. 22(4), pages 543-553, April.
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    More about this item

    Keywords

    ECONOMIC MODELS ; DYNAMIC ANALYSIS ; MACROECONOMICS;

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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