Modelling Occasionally Binding Constraints Using Regime-Switching
Andrew Binning and
Junior Maih ()
No 2017/23, Working Paper from Norges Bank
Occasionally binding constraints are part of the economic landscape: for instance recent experience with the global financial crisis has highlighted the gravity of the lower bound constraint on interest rates; mortgagors are subject to more stringent borrowing conditions when credit growth has been excessive or there is a downturn in the economy. In this paper we take four common examples of occasionally binding constraints in economics and demonstrate how to use regime-switching to incorporate them into DSGE models. In particular we investigate the zero lower bound constraint on interest rates, occasionally binding collateral constraints, downward nominal wage rigidities and irreversible investment. We compare our approach against some well-known methods for solving occasionally-binding constraints. We demonstrate the versatility of our regime-switching approach by combining multiple occasionally binding constraints to a model solved using higher-order perturbation methods, a feat that is difficult to achieve using alternative methodologies.
Keywords: Occasionally Binding Constraints; DSGE models; ZLB; Collateral Constraints (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Working Paper: Modelling Occasionally Binding Constraints Using Regime-Switching (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2017_23
Access Statistics for this paper
More papers in Working Paper from Norges Bank Contact information at EDIRC.
Bibliographic data for series maintained by ().