Pain of Paying in a Business Cycle Model

20 Pages Posted: 2 Feb 2018 Last revised: 17 Apr 2019

See all articles by Baptiste Massenot

Baptiste Massenot

Goethe University Frankfurt - Research Center SAFE

Date Written: April 12, 2019

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. Although consumers maximize their utility and have perfect foresight, the model does not have an Euler equation. As a result, the marginal propensity to consume of liquid consumers can be high, in line with the empirical evidence. Furthermore, several puzzles disappear: forward guidance is not overly powerful, negative supply shocks do not stimulate the economy, lower interest rates are not deflationary, and the equilibrium is unique. Finally, the model is tractable and can be easily solved in closed form.

Suggested Citation

Massenot, Baptiste, Pain of Paying in a Business Cycle Model (April 12, 2019). 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)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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