Laurence ball, N. Gregory Mankin, and David Romer average social and average private costs are second order, Ball and Romer show that the former may be much larger: fluctuationsin aggregate demand can be much more costly than fluctuations in relative prices. As a result, small frictions can prevent firms from adopting greater flexibility even if business cycles are highly inefficient STILL LARGER RIGIDITIES The papers discussed so far establish that nominal rigidities can b far larger than the frictions that cause them. But as we now describe, the simple models in these papers cannot fully explain nonneutralities of the size and persistence observed in actual economies. Therefore, we turn to more complicated models that incorporate realistic phenomena that magnify nominal rigidities, These phenomena include rigidities in real wages and prices and asynchronized timing of price changes by different firms Real rigidities. As we argue above, real rigidities alone are no impediment to full nominal flexibility. But Ball and Romer show that a high degree of real rigidity, defined as small responses of real wages and real prices to changes in real demand, greatly increases the nonneutral- ities arising from small nominal frictions. g This finding is important because, although models with nominal frictions but no real rigidities can in principle produce large nominal rigidities, they do so only for implausible parameter values. Most mportant, large rigidities arise only if labor supply is highly elastic, while labor supply elasticities in actual economies appear small. The role of labor supply is illustrated by a hypothetical economy with imperfect competition and menu costs in the goods market but a Walrasian labor market. If menu costs led to nominal price then nominal shocks would cause large shifts in labor demand supply were inelastic, these shifts in labor demand would changes in the real wage and thereby create large incentives for price setters to adjust their prices. As a result, nominal rigidity would not be an equilibrium While for plausible parameter values nominal frictions alone produce little nominal rigidity, Ball and Romer show that considerable rigidity 9. Laurence Ball and David Romer, " "Real Rigidities and the Non-Neutrality of Money, " Working Paper 2476(NBER, December 1987)