Price Setting and Volatility: Evidence from Oil Price Volatility Shocks

Thu, 01 Jan 2026 00:00:00 +0000

This paper asks whether increases in aggregate volatility reduce the effectiveness of monetary policy by making aggregate prices more flexible. The motivation is concrete: policymakers worry that during episodes of high volatility, prices may become more synchronized in their adjustment, reducing monetary non-neutrality and limiting the ability of nominal stimulus to raise real output.

The empirical strategy exploits variation in oil price volatility as a plausibly exogenous source of aggregate cost volatility. Oil price volatility is measured using a stochastic volatility model estimated on monthly WTI spot prices from 1986 to 2014 (Bayesian MCMC with particle filter). The key identification device is a Bartik-style interaction: an industry’s pre-determined oil input share (from the 1997 Input-Output Use Table, expressed as oil spending relative to value added) is interacted with the time-varying aggregate oil price volatility. Industries more dependent on oil should respond more strongly to oil price volatility shocks, while the time fixed effects absorb any aggregate confounders. The micro-price data are confidential item-level Producer Price Index records from the BLS covering 81 four-digit NAICS manufacturing industries from January 1998 to December 2014, with roughly 100,000 prices collected monthly from about 25,000 reporters.

Matthew Klepacz | Macro Paper Warehouse

Price Setting and Volatility: Evidence from Oil Price Volatility Shocks