Heterogeneity in the pass-through from oil to gasoline prices: A new instrument for estimating the price elasticity of gasoline demand

Kilian, Lutz; Zhou, Xiaoqing

Heterogeneity in the pass-through from oil to gasoline prices: A new instrument for estimating the price elasticity of gasoline demand

No 685, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We propose a new instrument for estimating the price elasticity of gasoline demand that exploits systematic differences across U.S. states in the pass-through of oil price shocks to retail gasoline prices. These differences, which are primarily driven by variation in the cost of producing and distributing gasoline, create cross-sectional dispersion in gasoline price growth in response to an aggregate oil price shock. We find that the elasticity was stable near -0.3 until the end of 2014, but subsequently rose to about -0.2. Our estimates inform the recent debate about gasoline-tax holidays and policies to reduce carbon emissions.

Keywords: Price elasticity of gasoline demand; pass-through; gasoline tax; gasoline supply; identification; IV; cross-section (search for similar items in EconPapers)
JEL-codes: D12 L71 Q31 Q41 Q48 R48 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ene and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:685

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