Small Menu Costs And Large Business Cycles: A Macroeconomic Model Of Monopoly

The conflict between modern neoclassical and traditional Keynesian theories of the business cycle centers upon the pricing mechanism.' In neoclassical models, prices are fully flexible. They represent the continuous optimization of economic agents and the continuous intersection of supply and demand. In Keynesian models, prices are often assumed to be sticky. They do not necessarily equilibrate all markets at all times. One of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this Keynesian price stickiness.