Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144570
Authors: 
Holden, Tom D.
Year of Publication: 
2016
Abstract: 
We present the first necessary and sufficient conditions for there to be a unique perfect-foresight solution to an otherwise linear dynamic model with occasionally binding constraints, given a fixed terminal condition. We derive further conditions on the existence of a solution in such models. These results give determinacy conditions for models with occasionally binding constraints, much as Blanchard and Kahn (1980) did for linear models. In an application, we show that widely used New Keynesian models with endogenous states possess multiple perfect foresight equilibrium paths when there is a zero lower bound on nominal interest rates, even when agents believe that the central bank will eventually attain its long-run, positive inflation target. This illustrates that a credible long-run inflation target does not render the Taylor principle sufficient for determinacy in the presence of the zero lower bound. However, we show that price level targeting does restore determinacy in these situations.
Subjects: 
occasionally binding constraints
zero lower bound
existence
uniqueness
price targeting
Taylor principle
linear complementarity problem
JEL: 
C62
E3
E4
E5
Document Type: 
Preprint

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