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Optimal policy with occasionally binding constraints: piecewise linear solution methods

Richard Harrison () and Matt Waldron ()

No 911, Bank of England working papers from Bank of England

Abstract: This paper develops a piecewise linear toolkit for optimal policy analysis of linear rational expectations models, subject to occasionally binding constraints on (multiple) policy instruments and other variables. Optimal policy minimises a quadratic loss function under either commitment or discretion. The toolkit accounts for the presence of ‘anticipated disturbances’ to the model equations, allowing optimal policy analysis around scenarios or forecasts that are not produced using the model itself (for example, judgement-based forecasts such as those often produced by central banks). The flexibility and applicability of the toolkit to very large models is demonstrated in a variety of applications, including optimal policy experiments using a version of the Federal Reserve Board’s FRB/US model.

Keywords: Optimal policy; commitment; discretion; occasionally binding constraints (search for similar items in EconPapers)
JEL-codes: C61 C63 E61 (search for similar items in EconPapers)
Pages: 90 pages
Date: 2021-02-26
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-ore
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