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Can exchange rate pass-through explain the asymmetric gasoline puzzle? Evidence from a pooled panel threshold analysis of the EU

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  • Chen, Chaoyi
  • Polemis, Michael
  • Stengos, Thanasis

Abstract

This study contributes to the literature since it tries to link the Exchange Rate Pass-Through (ERPT) with the “rockets and feathers” hypothesis using a panel of EU-28 countries. Allowing for the existence of an endogenous threshold variable our empirical findings indicate that the threshold model is better suited to this analysis than the baseline linear adjustment model. This is the case since the latter restricts the threshold to be centered around zero and the dynamic response to cumulative shocks cannot be properly identified. The empirical findings reveal that the threshold variable expressed by the trade-weighted dollar exchange rate index is statistically significant only in the sample above the threshold (high regime). This means that for the net EU exporting countries, fluctuations in the real effective exchange rate of the US against its major EU trading partners do affect the level of pre-tax retail gasoline prices with the relevant elasticity exceeding unity (complete ERPT). Moreover, all the statistical tests reject the null hypothesis that there is no significant threshold and thus an asymmetric adjustment gasoline mechanism prevails. The impulse response functions confirm our empirical findings that ERPT can explain asymmetric gasoline pricing within the EU periphery.

Suggested Citation

  • Chen, Chaoyi & Polemis, Michael & Stengos, Thanasis, 2019. "Can exchange rate pass-through explain the asymmetric gasoline puzzle? Evidence from a pooled panel threshold analysis of the EU," Energy Economics, Elsevier, vol. 81(C), pages 1-12.
  • Handle: RePEc:eee:eneeco:v:81:y:2019:i:c:p:1-12
    DOI: 10.1016/j.eneco.2019.03.010
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    Keywords

    Asymmetric gasoline adjustment; ERPT; Threshold analysis; Εxchange rate; Non-linear effects;

    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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