Pain of Paying in a Business Cycle Model

Baptiste Massenot

No 194, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: Motivated by the consumer behavior literature, this paper presents a new business cycle model in which consumers incur a pain of paying and neglect the opportunity costs of consumption. The model has a unique equilibrium and can be easily solved in closed form. Although consumers maximize their utility and have perfect foresight, there is no Euler equation. Several New Keynesian puzzles disappear as a result: negative supply shocks do not stimulate the economy, lower interest rates are not deflationary, and forward guidance is not overly powerful.

Date: 2020, Revised 2020
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:194

DOI: 10.2139/ssrn.3116623

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