The unbearable lightness of equilibria in a low interest rate environment
Structural models with no solution are incoherent, and those with multiple solutions are incomplete. We show that models with occasionally binding constraints are not generically coherent. Coherency requires restrictions on the parameters or on the support of the distribution of the shocks. In presence of multiple shocks, the support restrictions cannot be independent from each other, so the assumption of orthogonality of structural shocks is incompatible with coherency. Models whose coherency is based on support restrictions are generically incomplete, admitting a very large number of minimum state variable solutions.
Keywords: incompleteness, incoherency, rational expectations, zero lower bound, DSGE
JEL codes: C62, E4, E52
DNB Working Paper No. 734
- Guido Ascari
- Sophocles Mavroeidis