Simulating Multiple Equilibria in Rational Expectations Models With Occasionally-Binding Constraints : An Algorithm and a Policy Application

This paper presents an algorithm for simulating multiple equilibria in otherwise-linearmodels with perfect foresight and occasionally-binding constraints. We extend theguess-verify approach of Guerrieri and Iacoviello (2015) to detect and simulate multipleperfect foresight equilibria, and also to allow non-zero news shocks. We also show howto check if multiple solutions can be ruled out in a given model, using results in Holden(2022). We apply our algorithm to a New Keynesian model with a zero lower bound onnominal interest rates and multiple equilibria, including a ‘bad’ solution with strongdeflation due to self-fulfilling pessimistic expectations. A price-level targeting ruledoes not always eliminate the bad solution, but it shrinks the indeterminacy regionsubstantially and improves stabilization relative to conventional policies