Should Single-Equation Dynamic Gasoline Demand Models Include Moving Average Terms?

Abstract

We argue that single-equation dynamic demand models applied to estimating gasoline demand should account for the slow evolution of unobservable habits and beliefs which partially determine vehicle and gasoline usage. Inclusion of unobservable habits implies that single-equation models should include moving-average terms. Ordinary least squares estimation, ubiquitous in the literature, is thus inappropriate. Using examples from Australia and the U.S., we show that estimates of long-run price and income elasticities become much less precise.

Keywords: Single-equation demand analysis, lagged adjustment, habit formation, gasoline elasticity

JEL Classification: C2, Q41