Describe the empirical research on the stickiness of prices. Given some doubt on how sticky prices are, why is it nevertheless useful for the Keynesian model to assume that prices are sticky, especially when analyzing monetary policy?

What will be an ideal response?

Carlton showed that price stickiness is greater, the less competitive is the industry. Blinder and his students found a high degree of price stickiness, though Kashyap's results suggested that the stickiness may not arise because of menu costs. A more comprehensive study by Bils and Klenow found much less price stickiness that earlier; though Nakamura and Steinsson showed that some of the Bils—Klenow result came from failure to account for sales. Boivin—Giannoni—Mihov found that prices are not sticky in response to supply or demand shocks in an industry, but they are sticky in the face of shocks to monetary policy. So, the price stickiness assumption is useful when analyzing monetary policy and other aggregate shocks.