Computation of solutions to dynamic models with occasionally binding constraints

Tom Holden

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: We construct the first algorithm for the perfect foresight solution of otherwise linear models with occasionally binding constraints, with fixed terminal conditions, that is guaranteed to return a solution in finite time, if one exists. We also provide a proof of the inescapability of the “curse of dimensionality” for this problem when nothing is known a priori about the model. We go on to extend our algorithm to deal with stochastic simulation, other non-linearities, and future uncertainty. We show that the resulting algorithm produces fast and accurate simulations of a range of models with occasionally binding constraints.

Keywords: occasionally binding constraints; zero lower bound; computation; DSGE; linear complementarity problem (search for similar items in EconPapers)
JEL-codes: C61 C63 E3 E4 E5 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cmp, nep-cse, nep-dge, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (69)

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Related works:
Working Paper: Computation of solutions to dynamic models with occasionally binding constraints (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:144569

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