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This paper explores an alternative specification of the utility function and its theoretical implications for the New Keynesian model. I consider a model where wealth enters in the utility function. My contribution is to study the case of nonseparability between consumption and future wealth. I do not assume any functional form for the utility function. I consider the general case and derive linearized equations for consumption and labor supply. I show that nonseparability disentangles between the income effect on labor supply and the intertemporal substitution effect. I derive several implications for the dynamics of output, output gap, real wages and unemployment following monetary policy and demand shocks. Then, I estimate a medium scale DSGE model with bayesian methods and focus on the two key parameters introduced by (i) wealth in the utility function (ii) nonseparability between consumption and assets. I find large and positive values for both, providing some support for this specification of the utility function.
