Macroeconomics Seminar

Du 08/10/2020 de 16:00 à 17:30

PSE - 48 boulevard Jourdan, 75014 Paris, salle R1-14

GABALLO Gaetano (HEC)

Learning by Shopping: Consumers' Expectations and Monetary Shocks

New micro-evidence shows that households’ inflation expectations are influenced by the prices they see while shopping. This paper studies the implications of the signaling power of prices for the optimal pricing of firms, the propagation of monetary shocks and the effectiveness of communication policies. In our theory, consumers see the prices posted in their local markets and then choose whether to exert effort to buy at the cheapest price in a competitive market. Upon a rise in local prices, consumers are confused about the aggregate or local nature of the shock, and so on whether switching is worth. Because of this confusion, an otherwise-neutral money shock coordinates consumers’ switching away from high-markup firms and increases aggregate consumption. We demonstrate the generality of this result when consumers’ demand has standard properties and firms’ pricing is friction-less. Thus, the model is able to replicate the empirical correlation of inflation and economic activity overturning the standard New Keynesian logic based on firms’ sticky prices. We embed this mechanism in a fully micro-founded general equilibrium model to show that nominal price level stabilization has first-order impact on Welfare. For realistic calibrations, providing more precise information about aggregate inflation is more valuable when mostly consumers, rather than firms, absorb it, whereas it could even be counter-productive otherwise.