Standard models of imperfectly competitive labor market predict that real wages are unaffected by productivity. This is in conflict with empirical evidence. We integrate imperfectly competitive labor markets in a fully specified dynamic macromodel. While temporary shocks are consistent with the...

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...