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

Tom Holden

No 09/2022, Discussion Papers from Deutsche Bundesbank

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 non-linear models.

Keywords: occasionally binding constraints; zero lower bound; determinacy; existence; uniqueness; price level targeting (search for similar items in EconPapers)
JEL-codes: C62 E3 E4 E5 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Existence and Uniqueness of Solutions to Dynamic Models with Occasionally Binding Constraints (2023)
Working Paper: Existence and uniqueness of solutions to dynamic models with occasionally binding constraints (2019)
Working Paper: Existence and uniqueness of solutions to dynamic models with occasionally binding constraints (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:092022

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