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Temptation-driven preferences: A resolution to New Keynesian anomalies

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  • Airaudo, Marco

Abstract

For empirically plausible calibrations, the New Keynesian model delivers several anomalous results: positive correlation between inflation and nominal rates, higher output volatility with more flexible prices, low government spending multipliers, and unreasonably large responses at the zero-lower-bound, . The introduction of behavioral consumers characterized by Gul–Pesendorfer’s temptation-with-self-control preferences – a well-documented feature of experimental/field evidence on individual choices under risk and over time – resolves the anomalies while retaining the elegance and analytical tractability of the baseline 3-equation framework.

Suggested Citation

  • Airaudo, Marco, 2025. "Temptation-driven preferences: A resolution to New Keynesian anomalies," European Economic Review, Elsevier, vol. 172(C).
    • Handle: RePEc:eee:eecrev:v:172:y:2025:i:c:s0014292124002617
    DOI: 10.1016/j.euroecorev.2024.104932
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    Keywords

    Monetary policy; New Keynesian model; Temptation; Self-control; Policy paradoxes;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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