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

Arbeitspapier

Occasionally binding constraints (OBCs) like the zero lower bound (ZLB) can lead to multiple equilibria, and so to belief-driven recessions. To aid in finding policies that avoid this, we derive existence and uniqueness conditions for otherwise linear models with OBCs. Our main result gives necessary and sufficient conditions for such models to have a unique ('determinate') perfect foresight solution returning to a given steady state, for any initial condition. While standard New Keynesian models have multiple perfect-foresight paths eventually escaping the ZLB, price level targeting restores uniqueness. We also derive equilibrium existence conditions under rational expectations for arbitrary non-linear models.

Object Details

• ISBN: 978-3-95729-877-5
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Deutsche Bundesbank Discussion Paper ; No. 09/2022

Classification and Topics

• Classification: Wirtschaft ; Existence and Stability Conditions of Equilibrium
• Subject: occasionally binding constraints ; zero lower bound ; determinacy ; existence ; uniqueness ; price level targeting

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Holden, Tom D.
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/251606
• Last update: 10.03.2025, 11:41 AM CET