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. Learning by shopping anchors households’ beliefs about inflation to past inflation, making them disagree with firms about the value of the real wage. This disagreement allows nominal shocks to have real effects. It also makes the slope of the Phillips curve a function of the degree of anchoring, which is endogenous and depends on the monetary policy stance. A more hawkish monetary policy, like the one observed in the post-Volcker era, anchors households’ inflation expectations, flattens the Phillips curve, and reduces the volatility and persistence of inflation. Such a policy also alters the drivers of business cycles, diminishing the impact of supply shocks on output while making it more susceptible to exogenous shifts in aggregate demand.
