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Demand and Price Uncertainty: Rational Habits in International Gasoline Demand

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  • Scott, K. Rebecca

    ()
    (University of California, Berkeley. Dept of agricultural and resource economics)

Abstract

The combination of habits and a forward outlook suggests that consumers will be sensitive not just to prices but to price dynamics. In particular, rational habits models suggest 1. that price volatility and uncertainty will reduce demand for a habit-forming good and 2. that such volatility will dampen demand?s responsiveness to price. These two implications can be tested by augmenting a traditional partial-adjustment or error-correction model of demand. I apply this augmented model to data on gasoline consumption, as rational habits provide a succinct representation for the investment and behavioral decisions that determine gasoline usage. The trade-o¤s among FE 2SLS, system GMM, and pooled mean group (PMG) estimators are considered, and my preferred estimators provide evidence of rational habits in a panel of 29 countries for the years 1990-2011. Such habits may help to explain some of the cross-country and cross-time variation in ?total?price elasticity. These habits also imply that the e¤ect of price uncertainty must be taken into account when projecting the impacts of potential policies on gasoline consumption.

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Bibliographic Info

Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1131.

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Length: 44 pages
Date of creation: Mar 2013
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Handle: RePEc:are:cudare:1131

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Keywords: gasoline demand; rational habits; price elasticity;

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