OccBin: A Toolkit for Solving Dynamic Models with Occasionally Binding Constraints Easily

50 Pages Posted: 16 Jul 2014

See all articles by Luca Guerrieri

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies

Date Written: July 7, 2014

Abstract

We describe how to adapt a first-order perturbation approach and apply it in a piecewise fashion to handle occasionally binding constraints in dynamic models. Our examples include a real business cycle model with a constraint on the level of investment and a New Keynesian model subject to the zero lower bound on nominal interest rates. We compare the piecewise linear perturbation solution with a high-quality numerical solution that can be taken to be virtually exact. The piecewise linear perturbation method can adequately capture key properties of the models we consider. A key advantage of this method is its applicability to models with a large number of state variables.

Keywords: Occasionally binding constraints, DSGE models, regime shifts, first-order perturbation

JEL Classification: C61, C63

Suggested Citation

Guerrieri, Luca and Iacoviello, Matteo M., OccBin: A Toolkit for Solving Dynamic Models with Occasionally Binding Constraints Easily (July 7, 2014). FEDS Working Paper No. 2014-47. Available at SSRN: https://ssrn.com/abstract=2466637 or http://dx.doi.org/10.2139/ssrn.2466637

Luca Guerrieri (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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