Jordi Galí, J. David López-Salido and Javier Vallés analyze the effects of government spending on consumption using a new Keynesian model with rule-of-thumb consumers. They find that existing evidence suggests government spending increases consumption, while investment either falls or does not respond significantly. This contradicts the predictions of the standard RBC model, which predicts a decline in consumption in response to government spending. The authors develop a model that incorporates rule-of-thumb consumers, who do not borrow or save and consume their wage instead. This model accounts for the observed effects of government spending on consumption. The presence of rule-of-thumb consumers and sticky prices allows for a procyclical response of consumption to government spending. The model shows that the interaction of rule-of-thumb consumers with sticky prices and deficit financing can explain the observed effects of government spending. The analysis of the model's equilibrium dynamics shows that the coexistence of sticky prices and rule-of-thumb consumers is necessary for an increase in government spending to raise aggregate consumption. The model's predictions are consistent with the existing evidence on the effects of government spending on consumption. The authors also find that the presence of rule-of-thumb consumers and sticky prices is necessary for the model to generate the desired procyclical response of consumption. The model's results suggest that the effects of government spending on consumption depend on the interaction of several factors, including the degree of price stickiness and the extent of deficit financing. The authors conclude that their model can potentially account for the existing evidence on the effects of government spending on consumption.Jordi Galí, J. David López-Salido and Javier Vallés analyze the effects of government spending on consumption using a new Keynesian model with rule-of-thumb consumers. They find that existing evidence suggests government spending increases consumption, while investment either falls or does not respond significantly. This contradicts the predictions of the standard RBC model, which predicts a decline in consumption in response to government spending. The authors develop a model that incorporates rule-of-thumb consumers, who do not borrow or save and consume their wage instead. This model accounts for the observed effects of government spending on consumption. The presence of rule-of-thumb consumers and sticky prices allows for a procyclical response of consumption to government spending. The model shows that the interaction of rule-of-thumb consumers with sticky prices and deficit financing can explain the observed effects of government spending. The analysis of the model's equilibrium dynamics shows that the coexistence of sticky prices and rule-of-thumb consumers is necessary for an increase in government spending to raise aggregate consumption. The model's predictions are consistent with the existing evidence on the effects of government spending on consumption. The authors also find that the presence of rule-of-thumb consumers and sticky prices is necessary for the model to generate the desired procyclical response of consumption. The model's results suggest that the effects of government spending on consumption depend on the interaction of several factors, including the degree of price stickiness and the extent of deficit financing. The authors conclude that their model can potentially account for the existing evidence on the effects of government spending on consumption.