2025/01/11 by Cai, Chunbing, Roulleau-Pasdeloup, Jordan, Zheng, Zhongxi · 1 citation
#FOS: Economics and business #General Economics (econ.GN)
paper · doi:10.48550/arxiv.2501.06473
We develop a perfect foresight method to solve models with an interest rate lower bound constraint that nests OccBin/DynareOBC and \citeEggertsson2010's as well as \citeMertens2014's pen and paper solutions as special cases. Our method generalizes the pen-and-paper solutions by allowing for endogenous persistence while maintaining tractability and interpretability. We prove that our method necessarily gives stable multipliers. We use it to solve a New Keynesian model with habit formation and government spending, which we match to expectations data from the Great Recession. We find an output multiplier of government spending close to 1 for the US and Japan.