In recent years, the New Keynesian general equilibrium model has become the standard model for monetary policy analysis and today variants of the model are widely used by both academic institutions and many central banks. The model is based on a foundation of neoclassical elements with optimizing agents and rational expectations. However, prices are assumed to be sticky, which means that monetary shocks affect the real economy. While most economists agree that sticky prices are the reason why monetary shocks are not neutral, it has been less clear why prices are sticky. Nevertheless, the importance of distinguishing between alternative theories has never been questioned. This is because it has long been known that different assumptions about why prices are sticky have a major impact on both the quantitative and normative properties of the model. This has generated considerable interest in the empirical investigation of how prices are determined. The results from these studies suggest that price formation in the economy is much more complex than previously thought: prices change more frequently, the changes are larger, and they are modified by different factors than previously assumed. Moreover, it is a heterogeneous process where different firms follow different strategies. The aim of this research project is to incorporate into the New Keynesian model some of the newly found empirical relationships that seem most relevant from a macro-policy perspective.