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Retail Energy Prices and Consumer Expenditures

  • Edelstein, Paul
  • Kilian, Lutz

In the absence of a major disruption in spending by consumers and firms, the effects of energy price shocks on the economy will be small. In this paper, we quantify the direct effect on real consumption of (1) unanticipated changes in discretionary income, (2) shifts in precautionary savings, and (3) changes in the operating cost of energy-using durables. We also evaluate the evidence for asymmetries in the response of real consumption that would be expected, for example, if shifting expenditure patterns cause sectoral reallocations. While we do find evidence of changing expenditure patterns based on a detailed analysis of more than 130 expenditure items, there is no compelling evidence for an allocative effect on consumer spending, aggregate unemployment, or consumer expectations. The absence of such an effect, despite a comparatively large effect of energy price shocks on the consumption of new domestically produced automobiles, is consistent with the small share of the U.S. auto industry in domestic real GDP and employment. It is also consistent with the symmetric behavior of real consumption in 1979 (when energy prices rose sharply) and in 1986 (when they fell equally sharply). This finding has important implications for theoretical models of the transmission of energy price shocks. Our analysis also sheds light on the declining importance of energy price shocks for the U.S. economy. We not only document the extent to which consumption aggregates have become less responsive to energy price shocks since the mid-1980s, but we trace the declining importance of energy price shocks relative to the 1970s to changes in the composition of U.S. automobile production and the declining overall importance of the U.S. automobile sector.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6255.

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Date of creation: Apr 2007
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Handle: RePEc:cpr:ceprdp:6255
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  1. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 540-61, May.
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  7. Davis, Lucas W & Kilian, Lutz, 2007. "The Allocative Cost of Price Ceilings: Lessons to be Learned from the US Residential Market for Natural Gas," CEPR Discussion Papers 6142, C.E.P.R. Discussion Papers.
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  11. Hamilton, James D, 1988. "A Neoclassical Model of Unemployment and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 593-617, June.
  12. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
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  18. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June.
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  22. Goldberg, Pinelopi Koujianou, 1998. "The Effects of the Corporate Average Fuel Efficiency Standards in the US," Journal of Industrial Economics, Wiley Blackwell, vol. 46(1), pages 1-33, March.
  23. Davis, Steven J, 1987. "Allocative Disturbances and Specific Capital in Real Business Cycle Theories," American Economic Review, American Economic Association, vol. 77(2), pages 326-32, May.
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  25. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
  26. Ivanov Ventzislav & Kilian Lutz, 2005. "A Practitioner's Guide to Lag Order Selection For VAR Impulse Response Analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-36, March.
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