Brookings Papers on Economic Activity, 1: 1988 firms profit-maximizing price is tied to both the prices of its inputs and the prices of goods for which its product is an input(the latter influence demand for the firm s product). Thus a firm does not want to adjust its price to a shock if these other prices do not adjust at the same time. This reluctance to make asynchronized adjustments causes price level inertia. Blanchard shows that the degree of inertia increases the longer the chain of production: it takes a long time for the gradual adjustment of prices to make its way through a complicated system The literature on staggered price setting complements that on nominal rigidities arising from menu costs. The degree of rigidity in the aggregate price level depends on both the frequency and the timing of individual price changes. Menu costs cause prices to adjust infrequently. For a given frequency of individual adjustment, staggering slows the adjust- ment of the price level. Large aggregate rigidities can thus be explained by a combination of staggering and nominal frictions the former mag- nifies the rigidities arising from the latter. Asymmetric Effects of Demand shocks. We conclude this part of our discussion by mentioning a little-explored possibility for strengthening Keynesian models. The models surveyed imply symmetric responses of the economy tories and falls in nominal aggregate demand. Forexample, in menu cost models the range of shocks to which prices do not adjust is symmetric around zero, and so is the range of possible changes in output. But traditional Keynesian models often imply asymmetric effects of demand shifts In undergraduate texts for example, the aggregate supply curve is often drawn so that decreases in demand lead to large output losses while the effects of increases are mostly dissipated through higher prices. Such asymmetries are intuitively appealing, and they greatly strengthen the Keynesian view that demand stabilization is desirable stabilization raises the average levels of output and employment as well as reducing the variances. It is unclear whether plausible modifications of new Keynesian models can produce asymmetries. Asymmetric effects of shocks could arise from asymmetric price rigidity--prices that are ticky downward but not Ing no that is difficult to formalize. 3 Adjustment Costs