At low inflation rates, the main motivation for price changes is idiosyncratic shocks to firms and industries. In standard models of sticky prices, the existence of these idiosyncratic shocks makes prices more flexible and hence monetary policy less powerful to affect real variables (and less...

A large literature seeks to provide microfoundations of price setting for macro models. A challenge has been to develop a model in which monetary policy shocks have the highly persistent effects on real variables estimated by many studies. Nominal price stickiness has proved helpful but not...