The basic New Keynesian framework that is at the heart of most modern policy models building on dynamic stochastic general equilibrium analysis gives a central role to price and wage stickiness. At the same time, however, the framework incorporates fairly extreme assumptions about the ability of labour and capital to almost instantaneously move among alternative uses. To take a concrete example, in the baseline New Keynesian policy model the continuum of firms producing differentiated goods find it costly to change their selling prices, but these same firms can hire and fire workers at zero cost, and both workers and capital can instantly shift from one firm to another. These baseline models face great difficulties in matching observed macroeconomic dynamics. This is the basic reason why the versions of these models taken to data more often than not incorporate elements that are, in effect, ad hoc ie not derived from the first principles, but which are necessary in order for these models to be able to account for the type of sluggish adjustment so characteristic of the aggregate data. In order to draw more robust conclusions about their potential usefulness in understanding the way monetary policy actions affect the behaviour of the economy, the costs that impose binding constraints on labour and capital to move swiftly among alternative uses need to be thoroughly analyzed and accounted for. Furthermore, accounting fully for the potential effects of these costs may well turn out to be critical in assessing the welfare costs of economic fluctuations.