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Pain of Paying in a Business Cycle Model

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  • Massenot, Baptiste

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, 2020. "Pain of Paying in a Business Cycle Model," SAFE Working Paper Series 194, Leibniz Institute for Financial Research SAFE, revised 2020.
    • Handle: RePEc:zbw:safewp:194
    DOI: 10.2139/ssrn.3116623
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