July 2014

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

Luca Guerrieri and Matteo Iacoviello


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.

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

PDF: Full Paper

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Last Update: June 26, 2020