Business Cycles when Consumers Learn by Shopping


I study the consequences of consumer inattention to aggregate inflation on the transmission of macroeconomic shocks. I provide a theory where consumers acquire information about prices from their shopping experiences and use this information to learn about inflation. The key feature of the theory is that inattention anchors households’ perceptions about inflation, but the degree of anchoring is endogenous and depends on structural features of the economy. I show that this information friction alone simultaneously affects the aggregate demand and supply sides of the economy, propagating and amplifying the impact of demand shocks on output. Price stickiness exacerbates the propagation created by consumer inattention, and the interaction of both frictions can be larger than the total effect of each friction considered in isolation. I use the model to show analytically and quantitatively how a change in the conduct of monetary policy can simultaneously explain the anchoring of households’ inflation expectations, the flattening of the Phillips curve, and the lower volatility and persistence of inflation observed in the last decades. The theory suggests that such a policy change also has an unintended consequence: It makes the economy more vulnerable to exogenous shifts in aggregate demand.

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