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How do Gasoline Prices Respond to a Cost Shock ?

Erwan Gautier (), Magali Marx () and Paul Vertier

Working papers from Banque de France

Abstract: Using several millions of daily prices collected over the period 2007-2018 in France, we investigate how gasoline retail prices respond to a common shock on marginal cost (i.e. the wholesale gasoline price quoted on the Rotterdam market). We find that the pass-through is complete: a 1% change in Rotterdam price translates to a change in retail price of 0.8%, in line with the share of the wholesale gasoline in total costs. The adjustment is gradual: the full pass through takes about 3 weeks. In a broad class of sticky price models, the ratio of the kurtosis over the frequency of price changes is shown to be a sufficient statistic for the cumulative impulse response of prices (CIRP) to a nominal shock. We provide evidence that the sufficient statistic prediction holds when we look at how gasoline prices respond to a common cost shock. Relating, at the gas station level, the CIRP to moments of the price change distribution, we find that the CIRP correlates with the ratio of kurtosis over frequency, but also with both frequency and kurtosis taken separately. The sign and the magnitude of the correlations are fully in line with theoretical predictions. We also show that other moments do not correlate with CIRP as robustly as the frequency and the kurtosis.

Keywords: Price Rigidity; Gasoline; Sufficient Statistic (search for similar items in EconPapers)
JEL-codes: D43 E31 L11 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2022
New Economics Papers: this item is included in nep-com, nep-ene, nep-mac and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:861

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