Work

Existence and Uniqueness of Solutions to Dynamic Models with Occasionally Binding Constraints

Year: 2021

Type: article

Abstract: 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 nonlinear models.

Source: The Review of Economics and Statistics

DOI: 10.1162/rest_a_01122

Author: Tom D. Holden

Institution: Deutsche Bundesbank

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: University of Washington, European Commission, University of Surrey

Award: Integrated Macro-Financial Modelling for Robust Policy Design