Laurence BalL, N. Gregory Mankiw, and David Romer rationality, ' a small departure from full optimization. 23 In any case, the precise source offrictions is not important. The effects of nominal shocks are the same whether rigidity arises from printing costs, near-rationality or something else Inflation, the Frequency of Adjustment, and the Phillips Curve Recent research shows that nominal rigidity is possible in principle- that one can construct a model with firm microeconomic foundations in which rational agents choose substantial rigidity. But the validity of Keynesian theories is not thereby established. For these theories to be convincing, they must have empirical implications that contradict other macroeconomic theories, and these predictions must be confirmed by evidence. This section derives implications of recent Keynesian models and the next section tests them. As explained in the introduction, the main prediction is that the real effects of nominal shocks are smaller when average inflation is higher. Higher average inflation erodes the frictions that cause nonneutralities, for example by causing more fre- quent wage and price adjustments This section studies a specific model of the class described in the previous section. In the model, a cost of price adjustment leads firms to change prices at intervals rather than continuously. In addition te providing a basis for the empirical tests of the next major section, the model is of theoretical interest. Previous models of nominal rigidity are highly stylized; for example, most menu cost models are static. Our model is dynamic and has the appealing feature that the price level adjusts slowly over time to a nominal shock. The speed of adjustment which is treated as exogenous in older Keynesian models, is endogenous It depends on the frequency of price adjustment by individual firms hich in turn is derived from profit-maximization. 24 e first present the model and show that high average inflation educes the output effects of nominal shocks. We also show that highly variable aggregate demand reduces these effects. We then investigate 23, Akerlof and Yellen, A Near-Rational Model 24. The speed of adjustment is also endogenous in Laurence Ball, " "Externalities from Contract Length, American Economic Review, vol 77(September 1987), pp, 615-20