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Excerpt from The New Keynesian Microfoundations
The paper then goes on to present in Section IV a static model of monopolistic competition which forms the basis for the later discussion of price rigidity. This model is classical in that, without price rigidities, its unique equilibrium has monetary shocks affecting prices alone. In Section V, a once and for all change in the money stock is analyzed in a simple two period variant of the static model to which costs of changing prices have been added. In this model monetary expansions, at least if they fall within a certain range, affect output. While some issues which arise in models with more periods are masked by the two period assumption, this model has several interesting features including a multiplicity of equilibria. In particular, for a range of monetary shocks both changed and unchanged prices can be consistent with equilibrium.
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