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

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  • Holden, Thomas

Abstract

Policy makers would like to prevent self-fulfilling fluctuations. Given the prevalence of occasionally binding constraints (OBCs) such as the zero lower bound (ZLB), this requires understanding the determinacy of models with OBCs. To this end, we derive existence and uniqueness conditions for otherwise linear models with OBCs. Our main result gives necessary and sufficient conditions for such a model to have a unique perfect foresight solution returning to a given steady state, for any initial condition. We show that while standard New Keynesian models with a ZLB possess multiple perfect-foresight paths eventually escaping the ZLB, price level targeting restores determinacy.
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  • Holden, Thomas, 2016. "Existence and uniqueness of solutions to dynamic models with occasionally binding constraints," EconStor Preprints 130142, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:130142
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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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