New Keynesians' Theory Hits Home

Suppose for a moment you bought a house in 1989 for $125,000,approximately the average price of a home in the Chicago area.

Five years later, you want to unload. You list the house at asales price of $150,000 but are told that because of a glut in themarketplace comparable homes are selling for only $140,000.

You aren't persuaded and refuse to drop your price. You areconvinced that your house is different in location, decor andamenities from the rest. And maybe, just maybe, a buyer will comealong who is in a hurry to close or who loves the kitchen.

You opt to hold and allow the house to sit idle. So, too, dothousands of other people in the local housing …