This paper is a theoretical study of rural‐urban migration—urbanization—as it has occurred in many low‐income economies in the postwar period. This process is viewed as a transfer of labor from a traditional, land‐intensive technology to a human capital–intensive technology with an unending potential for growth. The model emphasizes the role of cities as places in which new immigrants can accumulate the skills required by modern production technologies.

This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real “menu cost.†We calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov. The prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies. The model is also used to conduct numerical experiments on the economy’s response to various shocks. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.