Abstract
This paper studies the macroeconomic consequences of consumers’ incomplete information about inflation. To do so, I extend the benchmark New Keynesian model by assuming that consumers rely on noisy information from their shopping experiences to form beliefs about inflation. In other words, I assume they learn by shopping. I show that this information 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 in isolation. 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 changed the drivers of the business cycle: It reduced the impact of supply shocks on aggregate output and made it more sensitive to exogenous shifts in aggregate demand.
