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

Tom Holden

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

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.

Keywords: occasionally binding constraints; zero lower bound; existence; uniqueness; price targeting (search for similar items in EconPapers)
JEL-codes: C62 E3 E4 E5 (search for similar items in EconPapers)
Date: 2019, Revised 2019
New Economics Papers: this item is included in nep-cse, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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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 (2022)
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:esprep:144570

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