Working Papers

Consumers rely on their shopping experiences to form beliefs about inflation. In other words, they learn by shopping. I study the consequences of this information friction for the transmission of macroeconomic shocks. I introduce learning by shopping in the benchmark New Keynesian model and show that this friction anchors households’ beliefs about inflation. However, the degree of anchoring is endogenous and depends on the model’s structural features, including the monetary policy stance. Learning by shopping propagates the impact of demand shocks on output, even when prices are flexible. Price stickiness exacerbates this propagation, and the interaction of both frictions can be larger than the sum of the effects of each friction considered separately. Moreover, learning by shopping makes the slope of the Phillips curve a function of the degree of anchoring. For this reason, a more hawkish monetary policy can simultaneously anchor households’ inflation expectations, flatten the Phillips curve, and lower the volatility and persistence of inflation. The model suggests that such a policy also has an unintended consequence: It makes the economy more vulnerable to exogenous shifts in aggregate demand.

The aim of this paper is to develop a simple, tractable and theoretically sound stochastic framework to deal with heterogeneous risk and time preferences. This we do in three steps: (i) study the comparative statics of the main deterministic model of risk and time preferences, the discounted expected utility, (ii) embed the model and its comparative statics within the random utility framework, and (iii) illustrate the empirical implementation of the model using several experimental datasets. The solidity of the proposed framework and its effectiveness in delivering novel methodological and empirical results of interest for the understanding of risk and time preferences are demonstrated throughout.

Deleveraging shocks that increase household precautionary savings, and financial and uncertainty shocks to firms, interact and amplify each other, even when these same shocks separately have moderate effects on output and employment. This result is obtained in a model in which heterogeneous households face financial frictions and unemployment risk and in which heterogeneous firms borrow funds using nominally fixed long-term debt and face costly bankruptcy. This novel amplification mechanism is based on a dynamic feedback between the precautionary behavior of households and the bankruptcy and entry decisions of firms. Our results support the view that firm financial frictions are important to understand the effect of household deleveraging on unemployment, consistent with recent empirical studies examining the 2007-2009 Great Recession.