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Efficient solution and computation of models with occasionally binding constraints

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  • Boehl, Gregor

Abstract

Structural estimation of macroeconomic models and new HANK-type models with extremely high dimensionality require fast and robust methods to efficiently deal with occasionally binding constraints (OBCs). This paper proposes a novel algorithm that solves for the perfect foresight path of piecewise-linear dynamic models. In terms of computation speed, the method outperforms its competitors by more than three orders of magnitude. I develop a closed-form solution for the full trajectory given the expected duration of the constraint. This allows to quickly iterate and validate guesses on the expected duration until a perfect-foresight equilibrium is found. A toolbox, featuring an efficient implementation, a model parser and various econometric tools, is provided in the Python programming language. Benchmarking results show that for medium-scale models with an occasionally binding interest rate lower bound, more than 150,000 periods can be simulated per second. Even simulating large HANK-type models with almost 1000 endogenous variables requires only 0.2 milliseconds per period.

Suggested Citation

  • Boehl, Gregor, 2022. "Efficient solution and computation of models with occasionally binding constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
  • Handle: RePEc:eee:dyncon:v:143:y:2022:i:c:s0165188922002275
    DOI: 10.1016/j.jedc.2022.104523
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    Cited by:

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    2. Böhl, Gregor & Lieberknecht, Philipp, 2021. "The hockey stick Phillips curve and the zero lower bound," IMFS Working Paper Series 153, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    3. Böhl, Gregor & Lieberknecht, Philipp, 2021. "The hockey stick Phillips curve and the effective lower bound," Discussion Papers 55/2021, Deutsche Bundesbank.

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    More about this item

    Keywords

    Occasionally binding constraints; Effective lower bound; Computational methods;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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