Rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks. And, by themselves, small frictions in nominal adjustment, such as costs of changing prices, create only small non-neutralities. But this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions. The paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for several specific sources of real rigidity: costs of adjusting real prices, asymmetric demand arising from imperfect information, and efficiency wages.
*Published:
Reprinted in Mankiw and Romer, New Keynesian Economics, M.I.T. Press, 1991.
Review of Economic Studies, Vol. 57, No. 2, pp. 183-203, (April 1990).
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