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Do changes in aggregate volatility alter the impulse response of output to monetary
policy? I use plausibly exogenous oil price volatility shocks and exploit heterogene-
ity in oil usage across industries to show that PPI item level price changes become
less frequent and more disperse 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. Match-
ing the new empirical facts, the model shows that increases in aggregate volatility
do not substantially reduce monetary policy effectiveness.
