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 a New Keynesian model to examine 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, creating disagreement with firms over the purchasing power of wages. This discrepancy allows nominal shocks to have real effects and makes the slope of the Phillips curve an endogenous function of the monetary policy stance. In particular, a more hawkish monetary policy increases the degree of anchoring of households’ inflation expectations, flattens the Phillips curve, and reduces the volatility and persistence of inflation. Such a policy also reshapes business cycle dynamics by amplifying the impact of demand shocks on output while making supply shocks more inflationary.
