Stickiness

We discuss an array of models of dynamically optimizing representative firms and workers, with inertia and price-wage stickiness modeled in various ways. The degree of price and wage stickiness bears no necessary connection to the strength of real effects of monetary policy. Matching the combination of real and nominal inertia in responses to monetary policy found in the data requires a more complex model, with more sources of stickiness and inertia, than has been standard in the literature. The pervasiveness of sluggish cross-variable responses in the macro data, combined with the implausibility of many of the microeconomic stories underlying adjustment cost models, suggests that we look for a different approach to modeling the sources of inertia in both prices and real variables. One such approach, based on limited information-processing capacity, is sketched.