John B. Taylor modeled wages (and later prices) as being reset at different times across workers or firms. This “staggering” made nominal rigidity compatible with rational expectations and helped explain why monetary shocks could have effects that last beyond a single contract period. It became a key building block for later New Keynesian models of sticky wages and prices.
Julio Rotemberg provided an explicit “microfoundation” for price stickiness by modeling costs of changing prices (often treated as a quadratic adjustment cost). Instead of assuming rigid prices, firms choose to change prices gradually because changing them is costly. This approach became a standard alternative to contract-based stickiness in New Keynesian work.
Guillermo Calvo proposed a tractable way to model sticky prices: in each period, only a random fraction of firms can re-optimize prices. This “Calvo pricing” setup made it easier to build dynamic general-equilibrium models with nominal rigidity and forward-looking behavior. It later became a dominant pricing assumption in New Keynesian DSGE models.
George Akerlof and Janet Yellen showed how small departures from full optimization (often described as “near-rational” behavior) can create meaningful macroeconomic effects. Their argument supported the idea that even small costs or behavioral limits can generate wage and price inertia. This strengthened the broader New Keynesian case for microfounded rigidities.
N. Gregory Mankiw argued that even small “menu costs” (the costs of changing posted prices) can lead firms to keep prices unchanged after demand shocks. Because imperfect competition creates markups, private incentives to adjust prices can differ from what is socially best, allowing small frictions to generate larger output fluctuations. This paper became a classic statement of the New Keynesian microfoundations project.
Olivier Blanchard and Nobuhiro Kiyotaki built a model where monopolistic competition and certain imperfections help explain why aggregate demand changes can move output. Their framework helped connect sticky-price stories to explicit market structure and markup behavior. It influenced later New Keynesian DSGE models that combine monopolistic competition with nominal rigidity.
Laurence Ball, N. Gregory Mankiw, and David Romer summarized how New Keynesian research aimed to replace “assumed” rigidities with explanations based on incentives and small frictions. They framed this as a response to earlier critiques that Keynesian models lacked solid microeconomic foundations. The article helped define the research agenda for New Keynesian macro in the late 1980s and 1990s.
Rotemberg and Michael Woodford analyzed how imperfect competition changes the behavior of otherwise standard dynamic general-equilibrium (DSGE) models. By emphasizing monopolistic competition and markups, their work helped align business-cycle modeling with New Keynesian market structure. It also supported building models where nominal rigidities interact with microfounded price setting.
Rotemberg examined whether a sticky-price model could match observed relationships among prices, output, and hours. He argued the model could fit key correlations in U.S. data and could be used to assess monetary policy behavior. This helped push the microfoundations project toward empirically usable New Keynesian models, not just theoretical ones.
Chari, Patrick Kehoe, and Ellen McGrattan asked whether staggered price setting could generate persistent output responses to monetary shocks in a quantitative equilibrium model. They concluded that, under their assumptions, the model produced too little “endogenous” stickiness and struggled to match persistence. Their critique shaped late-1990s debates over whether common New Keynesian microfoundations were strong enough for business-cycle dynamics.
Marvin Goodfriend and Robert King argued macroeconomics was converging on a “New Neoclassical Synthesis” combining intertemporal optimization and rational expectations with nominal rigidities. This framing connected New Keynesian price stickiness to the broader DSGE tradition rooted in real business cycle modeling. It helped set the stage for policy analysis using microfounded New Keynesian models.
Rotemberg and Woodford developed an “optimization-based” model intended for evaluating monetary policy rules using macro data. The framework derived key equations from forward-looking decisions by households and firms, rather than relying on ad hoc relationships. This work helped move New Keynesian economics toward quantitative policy evaluation within DSGE-style models.
Jordi Galí and Mark Gertler estimated a structural inflation equation consistent with the New Keynesian Phillips curve (NKPC), which links inflation to expected future inflation and real marginal cost. They tested whether inflation dynamics were mainly forward-looking, allowing for some backward-looking price setters. This work marked a key step in tying New Keynesian microfoundations to econometric evidence during the late 1990s transition into the 2000s.
Richard Clarida, Jordi Galí, and Mark Gertler synthesized how New Keynesian models imply systematic principles for monetary policy, including the role of inflation expectations and the output gap. Their overview helped translate the microfounded sticky-price framework into guidance for interest-rate rules and central banking practice. It became a widely cited reference for the “modern” approach to monetary policy analysis in New Keynesian terms.
New Keynesian Economics and the Microfoundations Project (1980–2000)