The unbearable lightness of equilibria in a low interest rate environment.

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Date: Apr. 2022
Publisher: Elsevier B.V.
Document Type: Report; Brief article
Length: 359 words

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Keywords Incompleteness; Incoherency; Rational expectations; Zero lower bound; DSGE Highlights * Models with no solution are incoherent; with multiple solutions are incomplete. * Models with occasionally binding constraints are not generically coherent. * Coherency needs restrictions on parameters or on the support of shock distributions. * These restrictions generally cause incompleteness. * The NK model is incoherent under typical parameterizations, but UMP can help. Abstract 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. Author Affiliation: (a) Department of Economics and Management, University of Pavia, Via San Felice 5, Pavia 27100, Italy (b) De Nederlandsche Bank, Spaklerweg 4, 1096 BA Amsterdam, Netherlands (c) Department of Economics, University of Oxford, Manor Road, OX1 3UQ, United Kingdom * Corresponding author. Article History: Received 6 July 2021; Revised 20 January 2022; Accepted 20 January 2022 (footnote)[white star] We would like to thank the editor Yuriy Gorodnichencko and an anonymous referee, Boragan Arouba, Mikkel Plagborg-Møller, Anton Nakov, Frank Schorfheide, Sebastian Schmidt, Nathaniel Throckmorton and the participants of the NBER-EFSF meeting on methods and applications for DSGE models at the Federal Reserve Bank of Philadelphia in October 2019, the North American Summer meeting of the Econometric Society, the 27th International Conference on Computing in Economics and Finance, the 1st Sailing Macro Workshop in Ventotene, and seminar participants at the ECB, University of Oxford, for useful comments and discussion. We also thank Julian Ashwin, Angus Groom, David Murakami and Sriram Tolety for research assistance. This research is funded by the European Research Council via Consolidator grant number 647152. Views expressed are those of the authors and do not necessarily reflect official positions of De Nederlandsche Bank. Byline: Guido Ascari [guido.ascari@unipv.it] (a,b), Sophocles Mavroeidis [sophocles.mavroeidis@economics.ox.ac.uk] (*,c)

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Gale Document Number: GALE|A700885613