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An Exploration of Australian Petrol Demand: Unobservable Habits, Irreversibility and Some Updated Estimates

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  • ROBERT V. BREUNIG
  • CAROL GISZ

Abstract

We explore a methodological improvement to the standard dynamic demand model for petrol - a general model which allows for slowly evolving, unobservable habits. If this habit formation model is correct, then standard estimation techniques produce inconsistent estimates. We find price elasticities of -0.13 (short-run) and -0.20 (long-run). Importantly, standard techniques are misleading about the precision of elasticity estimates and the confidence interval around the long-run price elasticity is quite wide. We test for price irreversibility and find, in contrast to the USA, almost no evidence that petrol responds differently to price increases and decreases. Copyright © 2009 The Economic Society of Australia.

Suggested Citation

  • Robert V. Breunig & Carol Gisz, 2009. "An Exploration of Australian Petrol Demand: Unobservable Habits, Irreversibility and Some Updated Estimates," The Economic Record, The Economic Society of Australia, vol. 85(268), pages 73-91, March.
  • Handle: RePEc:bla:ecorec:v:85:y:2009:i:268:p:73-91
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    References listed on IDEAS

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    1. John Dimitropoulos & Lester Hunt & Guy Judge, 2005. "Estimating underlying energy demand trends using UK annual data," Applied Economics Letters, Taylor & Francis Journals, vol. 12(4), pages 239-244.
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    Cited by:

    1. Scott, K. Rebecca, 2011. "Demand and Price Volatility: Rational Habits in International Gasoline Demand," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2q87432b, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Willem H. Boshoff, 2011. "Gasoline, diesel fuel and jet fuel demand in South Africa," Working Papers 226, Economic Research Southern Africa.
    3. Scott, K. Rebecca, 2012. "Rational habits in gasoline demand," Energy Economics, Elsevier, vol. 34(5), pages 1713-1723.
    4. Li, Zheng & Rose, John M. & Hensher, David A., 2010. "Forecasting automobile petrol demand in Australia: An evaluation of empirical models," Transportation Research Part A: Policy and Practice, Elsevier, vol. 44(1), pages 16-38, January.
    5. Valadkhani, Abbas, 2013. "Do petrol prices rise faster than they fall when the market shows significant disequilibria?," Energy Economics, Elsevier, vol. 39(C), pages 66-80.
    6. John Clark & Adam Hollis, 2013. "Tax-to-GDP: Past and Prospective Developments," Economic Roundup, The Treasury, Australian Government, issue 2, pages 15-34, December.
    7. Valadkhani, Abbas, 2013. "Modelling the terminal gate prices of unleaded petrol in Australia," Economic Modelling, Elsevier, vol. 33(C), pages 233-243.

    More about this item

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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