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How do Gasoline Prices Respond to a Cost Shock ?

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  • Erwan Gautier
  • Magali Marx
  • Paul Vertier

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.

Suggested Citation

  • Erwan Gautier & Magali Marx & Paul Vertier, 2022. "How do Gasoline Prices Respond to a Cost Shock ?," Working papers 861, Banque de France.
  • Handle: RePEc:bfr:banfra:861
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    Cited by:

    1. Odran Bonnet & Étienne Fize & Tristan Loisel & Lionel Wilner, 2024. "Compensation against Fuel Inflation: Temporary Tax Rebates or Transfers?," CESifo Working Paper Series 10917, CESifo.
    2. 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.
    3. 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.
    4. Dedola, Luca & Gautier, Erwan & Nakov, Anton & Santoro, Sergio & De Veirman, Emmanuel & Henkel, Lukas & Fagandini, Bruno, 2023. "Some implications of micro price-setting evidence for inflation dynamics and monetary transmission," Occasional Paper Series 321, European Central Bank.

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    More about this item

    Keywords

    Price Rigidity; Gasoline; Sufficient Statistic;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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