Perfect foresight simulation fails with ZLB

Hi Dynare Team,

It would be great if you could help me solve the following issue (mod file attached):

I have been coding up a simple NK model with trend inflation (log-linearised). I would like to perform optimal policy with a ZLB and thus have introduced [mcp= ‘R > -0.005’] where R is my nominal interest rate.

(1) The model works with the Ramsey policy command (commenting out the FOCs etc).

(2) Commenting out the ZLB constraint the perfect foresight command works with large and small shocks.

However, as soon as I introduce the ZLB constraint using a shock that brings me down to the ZLB the perfect foresight solution fails.

The model can only be solved if the shock is so small that I don’t even come near the ZLB. As soon as I hit the ZLB, the perfect foresight simulation fails.

I have worked through the perfect foresight posts in the Forum and tried all sorts of alterations to make it work but I’m afraid it still doesn’t. Could you please help me fix this?

Thanks a lot.

det_trend_infl_ZLB.mod (6.4 KB)

Why do you declare your model to be linear when it is obviously not due to the ZLB?

Dear jpfeifer,

Thanks for your quick reply! This clearly solves the above issue - thanks a lot.