Structural models with no solution are incoherent, and those with multiple solutions are incomplete. We develop a method to study coherency and completeness conditions for linear dynamic forward-looking rational expectations models under an occasionally binding constraint. In the context of the simple New Keynesian model with a zero lower bound, this method shows that the coherency and completeness condition generally violates the Taylor principle. Rational expectations require time-varying and correlated support restrictions on the distribution of the structural shocks. With appropriate restrictions , a very large number of equilibria can be supported .
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. These restrictions are rarely explicitly acknowledged or imposed in the literature. Models whose coherency is based on support restrictions are generically incomplete, admitting a very large number of minimum state variable solutions. These are distinct from the solutions due to indeterminacy in models without an effective lower bound constraint .
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develop a method to study coherency and completeness conditions for linear dynamic forward-looking rational expectations models under an occasionally binding constraint. In the context of the simple New Keynesian model with a zero lower bound, this method shows that the coherency and completeness condition generally violates the Taylor principle. Rational expectations require time-varying and correlated support restrictions on
show that models with occasionally binding constraints are not generically coherent. Coherency requires restrictions on the parameters or on the support of
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structural shocks. With appropriate restrictions ,
shocks. These restrictions are rarely explicitly acknowledged or imposed in the literature. Models whose coherency is based on support restrictions are generically incomplete, admitting
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equilibria can be supported
minimum state variable solutions. These are distinct from the solutions due to indeterminacy in models without an effective lower bound constraint