A dominant explanation of price rigidity is the so-called "menu cost model" according to which small costs of changing prices may imply that firms keep nominal prices unchanged to nominal shocks which therefore have real effects. Crucial to this explanation is the assumption that price...

The Great Recession has revived aggregate demand management policies. In particular, automatic stabilizers are praised since they are rule based and thus operate swiftly and symmetrically across the cycle. However, automatic stabilizers are not a result of macro design but the structure of the...