Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/268088 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
New Zealand Treasury Working Paper No. 22/02
Publisher: 
New Zealand Government, The Treasury, Wellington
Abstract: 
Recent experience with interest rates hitting the effective lower bound and agents facing binding borrowing constraints has emphasised the importance of understanding the behaviour of an economy in which some variables may be restricted at times. The extended path algorithm is a commonly used and fairly general method for solving dynamic nonlinear models with rational expectations. This algorithm can be used for a wide range of cases, including for models with occasionally binding constraints, or for forecasting with models in which some variables must satisfy a certain path. In this paper I propose computational improvements to the algorithm that speed up the calculations via vectorisations of the Jacobian matrix and residual equations. I illustrate the advantages of the method with a number of policy relevant applications: conditional forecasting with both exactly identified and underidentified shocks, occasionally binding constraints on interest rates, anticipated shocks, calendar-based forward guidance, optimal monetary policy with a binding constraint and transition paths.
Subjects: 
Extended path algorithm
conditional forecasting
occasionally binding constraints
effective lower bound
optimal monetary policy
transition paths
JEL: 
C53
C61
C63
E37
E47
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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