Abstract
Consumers rely on their shopping experiences to form beliefs about inflation. In other words, they learn by shopping. I introduce this empirical observation as an informational friction in the New Keynesian model and study its consequences for the transmission of aggregate shocks and the design of monetary policy. Learning by shopping anchors households’ beliefs about inflation to its past, causing disagreement with firms over the value of the real wage. The discrepancy allows nominal shocks to have real effects, making the slope of the Phillips curve an endogenous function of the degree of anchoring and the monetary policy stance. In particular, a more hawkish monetary policy anchors households’ inflation expectations, flattens the Phillips curve, and reduces the volatility and persistence of inflation. Such a policy also changes the drivers of business cycles: it amplifies the impact of aggregate demand shocks on output and makes supply shocks more inflationary.
