We study the purchasing power parity (PPP) puzzle in a multisector, two-country, sticky-price model. Sectors differ in the extent of price stickiness, leading to heterogeneous sectoral real exchange rate dynamics. Deviations from PPP are more volatile and persistent than in an otherwise...

The macroeconomic implications of downward nominal wage rigidities are analyzed via a dynamic stochastic general equilibrium model featuring aggregate and idiosyncratic shocks. A closed-form solution for a long-run Phillips curve relates average output gap to average wage inflation: it is...

This paper links the "coordination failure" and "menu cost" approaches to the microeconomic foundations of Keynesian macroeconomics. If a firm's desired price is increasing in others' prices, then the gain from price adjustment after a nominal shock is greater if others adjust. This "strategic...

Many Keynesian macroeconomic models are based on the assumption that firms change prices at different times. This paper presents an explanation for this "staggered" price setting. The authors develop a model in which firms have imperfect knowledge of the current state of the economy and gain...