Temptation-driven preferences: A resolution to New Keynesian anomalies

Marco Airaudo

European Economic Review, 2025, vol. 172, issue C

Abstract: For empirically plausible calibrations, the New Keynesian model delivers several anomalous results: positive correlation between inflation and nominal rates, higher output volatility with more flexible prices, low government spending multipliers, and unreasonably large responses at the zero-lower-bound, . The introduction of behavioral consumers characterized by Gul–Pesendorfer’s temptation-with-self-control preferences – a well-documented feature of experimental/field evidence on individual choices under risk and over time – resolves the anomalies while retaining the elegance and analytical tractability of the baseline 3-equation framework.

Keywords: Monetary policy; New Keynesian model; Temptation; Self-control; Policy paradoxes (search for similar items in EconPapers)
JEL-codes: E31 E32 E43 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:172:y:2025:i:c:s0014292124002617

DOI: 10.1016/j.euroecorev.2024.104932

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