Preprint
Existence, uniqueness and computation of solutions to dynamic models with occasionally binding constraints
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.
- Language
-
Englisch
- Classification
-
Wirtschaft
Optimization Techniques; Programming Models; Dynamic Analysis
Existence and Stability Conditions of Equilibrium
Computational Techniques; Simulation Modeling
General Aggregative Models: Forecasting and Simulation: Models and Applications
- Subject
-
occasionally binding constraints
zero lower bound
existence
uniqueness
price targeting
DSGE
linear complementarity problem
occasionally binding constraints
Low-interest-rate policy
existence
uniqueness
price targeting
DSGE model
linear complementarity problem
- Event
-
Geistige Schöpfung
- (who)
-
Holden, Tom D.
- Event
-
Veröffentlichung
- (who)
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ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
- (where)
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Kiel und Hamburg
- (when)
-
2016-02-11T13:34:58Z
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
This object is provided by:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Preprint
Associated
- Holden, Tom D.
- ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
Time of origin
- 2016-02-11T13:34:58Z
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