Existence, uniqueness and computation of solutions to dynamic models with occasionally binding constraints

Tom Holden

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: We present the first necessary and sufficient conditions for the existence of a unique perfect-foresight solution, returning to a given steady-state, in an otherwise linear model with occasionally binding constraints. We derive further conditions on the existence of a solution in such models, and provide a proof of the inescapability of the “curse of dimensionality” for them. We also construct the first solution algorithm for these models that is guaranteed to return a solution in finite time, if one exists. When extended to allow for other non-linearities and future uncertainty, our solution algorithm is shown to produce fast and accurate simulations. In an application, we show that widely used New Keynesian models with endogenous states possess multiple perfect foresight equilibrium paths when there is a zero lower bound on nominal interest rates. However, we show that price level targeting is sufficient to restore determinacy in these situations.

Keywords: occasionally binding constraints; zero lower bound; existence; uniqueness; price targeting; DSGE; linear complementarity problem (search for similar items in EconPapers)
JEL-codes: C61 C62 C63 E17 E3 E4 E5 (search for similar items in EconPapers)
Date: 2016-02-11
New Economics Papers: this item is included in nep-dge and nep-mac
Note: The latest version of this paper is available from: https://github.com/tholden/dynareOBC/raw/master/paper.pdf
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/127430/1/paper.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:127430

Access Statistics for this paper

More papers in EconStor Preprints from ZBW - Leibniz Information Centre for Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().