Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be asily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how...

This paper considers the appropriate stabilization objectives for monetary policy in a micro-founded model with staggered price-setting. Rotemberg and Woodford (1997) and Woodford (2002) have shown that under certain conditions, a local approximation to the expected utility of the representative...