Business Cycles when Consumers Learn by Shopping


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.

Working Paper