Pain of Paying in a Business Cycle Model

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.