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The Response of Consumer Spending to Changes in Gasoline Prices

Author

Listed:
  • Michael Gelman
  • Yuriy Gorodnichenko
  • Shachar Kariv
  • Dmitri Koustas
  • Matthew D. Shapiro
  • Dan Silverman
  • Steven Tadelis

Abstract

This paper estimates how overall consumer spending responds to changes in gasoline prices. It uses the differential impact across consumers of the sharp drop in gasoline prices in 2014 for identification. This estimation strategy is implemented using comprehensive, high-frequency, transaction-level data for a large panel of individuals. The average estimated marginal propensity to consume (MPC) out of unanticipated, permanent shocks to income is approximately one. This estimate accounts for the elasticity of demand for gasoline and potential slow adjustment to changes in prices. The high MPC implies that changes in gasoline prices have large aggregate effects.

Suggested Citation

  • Michael Gelman & Yuriy Gorodnichenko & Shachar Kariv & Dmitri Koustas & Matthew D. Shapiro & Dan Silverman & Steven Tadelis, 2023. "The Response of Consumer Spending to Changes in Gasoline Prices," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 129-160, April.
    • Handle: RePEc:aea:aejmac:v:15:y:2023:i:2:p:129-60
    DOI: 10.1257/mac.20210024
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    Cited by:

    1. Coibion, Olivier & Georgarakos, Dimitris & Gorodnichenko, Yuriy & van Rooij, Maarten, 2019. "How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial," Department of Economics, Working Paper Series qt3zh865pj, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. Ghoddusi, Hamed & Morovati, Mohammad & Rafizadeh, Nima, 2019. "Foreign Exchange Shocks and Gasoline Consumption," Energy Economics, Elsevier, vol. 84(C).
    3. Gelman, Michael, 2021. "What drives heterogeneity in the marginal propensity to consume? Temporary shocks vs persistent characteristics," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 521-542.
    4. Edmund Crawley & Andreas Kuchler, 2020. "Consumption Heterogeneity: Micro Drivers and Macro Implications," Finance and Economics Discussion Series 2020-005, Board of Governors of the Federal Reserve System (U.S.).
    5. Daniel H. Weinberg & John M. Abowd & Robert F. Belli & Noel Cressie & David C. Folch & Scott H. Holan & Margaret C. Levenstein & Kristen M. Olson & Jerome P. Reiter & Matthew D. Shapiro & Jolene Smyth, 2017. "Effects of a Government-Academic Partnership: Has the NSF-Census Bureau Research Network Helped Improve the U.S. Statistical System?," Working Papers 17-59r, Center for Economic Studies, U.S. Census Bureau.
    6. Stephanie Assad & Robert Clark & Daniel Ershov & Lei Xu, 2020. "Algorithmic Pricing and Competition: Empirical Evidence from the German Retail Gasoline Market," CESifo Working Paper Series 8521, CESifo.
    7. Xinheng Liu & Shuxian Li & Chengbo Fu & Xu Gong & Chen Fan, 2024. "The oil price plummeted in 2014–2015: Is there an effect on Chinese firms' labour investment?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 943-960, January.
    8. Crawley, Edmund, 2020. "In search of lost time aggregation," Economics Letters, Elsevier, vol. 189(C).
    9. Christiane Baumeister & James D. Hamilton, 2019. "Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks," American Economic Review, American Economic Association, vol. 109(5), pages 1873-1910, May.
    10. Caldara, Dario & Cavallo, Michele & Iacoviello, Matteo, 2019. "Oil price elasticities and oil price fluctuations," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 1-20.
    11. Alonso-Alvarez, Irma & Di Nino, Virginia & Venditti, Fabrizio, 2022. "Strategic interactions and price dynamics in the global oil market," Energy Economics, Elsevier, vol. 107(C).
    12. Mary A. Burke & Ali Ozdagli, 2023. "Household Inflation Expectations and Consumer Spending: Evidence from Panel Data," The Review of Economics and Statistics, MIT Press, vol. 105(4), pages 948-961, July.
    13. M. Adam & O. Bonnet & E. Fize & T. Loisel & M. Rault & L. Wilner, 2023. "How does fuel demand respond to price changes? Quasi-experimental evidence based on high-frequency data," Documents de Travail de l'Insee - INSEE Working Papers 2023-17, Institut National de la Statistique et des Etudes Economiques.
    14. Olivier Coibion & Dimitris Georgarakos & Yuriy Gorodnichenko & Maarten van Rooij, 2023. "How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(3), pages 109-152, July.
    15. Odran Bonnet & Étienne Fize & Tristan Loisel & Lionel Wilner, 2024. "Is Carbon Tax Truly More Salient? Evidence from Fuel Tourism at the France-Germany Border," CESifo Working Paper Series 10918, CESifo.
    16. Olivier Coibion & Yuriy Gorodnichenko & Dmitri Koustas, 2021. "Consumption Inequality and the Frequency of Purchases," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 449-482, October.
    17. Baumeister, Christiane & Hamilton, James, 2017. "Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Deman," CEPR Discussion Papers 12532, C.E.P.R. Discussion Papers.
    18. Knotek, Edward S. & Zaman, Saeed, 2021. "Asymmetric responses of consumer spending to energy prices: A threshold VAR approach," Energy Economics, Elsevier, vol. 95(C).
    19. Arampatzidis, Ioannis & Panagiotidis, Theodore, 2023. "On the identification of the oil-stock market relationship," Economic Modelling, Elsevier, vol. 120(C).

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources

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