Pain of Paying in a Business Cycle Model

27 Pages Posted: 2 Feb 2018 Last revised: 10 Feb 2020

See all articles by Baptiste Massenot

Baptiste Massenot

University of Toulouse - Toulouse Business School

Date Written: February 7, 2020

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.

Suggested Citation

Massenot, Baptiste, Pain of Paying in a Business Cycle Model (February 7, 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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