Real Rigidities (Blanchard and Kiyotaki)

A real rigidity occurs if some factor prevents real prices/wages (as determined by firm's MC and MR) from adjusting or there is relative stickiness between prices/wages. These are usually triggered by nominal changes, thus magnifying the non-neutralities resulting from small nominal frictions.
Examples include: price mark-ups (prices less likely to respond to marginal cost/revenue increase/declines because of mark-ups added), customer markets (low frequency of search relative to frequency of purchase, so increased prices may create a bigger loss), complexity of the input-output table (gradual adjustment of prices is safest for firms operating in uncertain world where information is imperfect), capital market imperfections (due to asymmetric information that must be allayed, external finances is more costly to a firm than internal finance), and finally, efficiency wages.
Basic Efficiency Wages Model
Key Equations: