Pain of Paying in a Business Cycle Model

27 Pages Posted: 2 Feb 2018 Last revised: 2 Oct 2020

See all articles by Baptiste Massenot

Baptiste Massenot

University of Toulouse - Toulouse Business School

Date Written: October 1, 2020

Abstract

This paper proposes a new toy business cycle model. The central assumption, motivated by studies of consumer behavior, is that consumers neglect the opportunity costs of consumption and experience instead a pain of paying. The equilibrium is unique and easily solved in closed form. The main predictions are in line with macroeconomics textbooks. However, the Euler equation and several New Keynesian puzzles disappear: negative supply shocks do not stimulate the economy, lower interest rates are not deflationary, and forward guidance is not overly powerful.

Suggested Citation

Massenot, Baptiste, Pain of Paying in a Business Cycle Model (October 1, 2020). SAFE Working Paper No. 194, Available at SSRN: https://ssrn.com/abstract=3116623 or http://dx.doi.org/10.2139/ssrn.3116623

Baptiste Massenot (Contact Author)

University of Toulouse - Toulouse Business School ( email )

20, bd Lascrosses
BP 7010
Toulouse, 31068
France

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