In these lecture notes, we will study the so{called perturbation method, a
class of method the linear approximation belongs to. The basic idea of this
approach is to include higher order terms in the approximation, and therefore
take both curvature and risk into account | therefore accounting for the two
¯rst points we raised in lecture notes 2. For further insights on these methods
see Judd [1998], Judd and Gaspard [1997], Sims [2000] or Schmitt-Grohe and
Uribe [2001]