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Price Setting and Volatility: Evidence from Oil Price Volatility Shocks

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  • Matthew Klepacz

Abstract

Do changes in aggregate volatility alter the impulse response of output to monetary policy? I use plausibly exogenous oil price volatility shocks and exploit heterogeneity in oil usage across industries to show that PPI item-level price changes become less frequent and more dispersed when volatility is high. This implies aggregate price flexibility does not increase when aggregate volatility is high. I construct a state-dependent pricing model with random menu costs to interpret the findings. Matching the new empirical facts, the model shows that increases in aggregate volatility do not substantially reduce monetary policy effectiveness.

Suggested Citation

  • Matthew Klepacz, 2026. "Price Setting and Volatility: Evidence from Oil Price Volatility Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(4), pages 163-199, October.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:4:p:163-99
    DOI: 10.1257/mac.20210258
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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources

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