Retail Energy Prices and Consumer Expenditures

71 Pages Posted: 21 May 2008

See all articles by Paul Edelstein

Paul Edelstein

Federal Reserve Bank of New York

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: April 2007

Abstract

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.

Keywords: asymmetry, consumer sentiment, consumption, energy prices, price elasticity of energy demand, purchasing power

JEL Classification: E21, Q43

Suggested Citation

Edelstein, Paul and Kilian, Lutz, Retail Energy Prices and Consumer Expenditures (April 2007). , Vol. , pp. -, 2007. Available at SSRN: https://ssrn.com/abstract=1135493

Paul Edelstein (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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