The Price of Gasoline and the Demand for Fuel Economy: Evidence from Monthly New Vehicles Sales Data

42 Pages Posted: 29 Nov 2009

See all articles by Thomas Klier

Thomas Klier

Federal Reserve Bank of Chicago

Joshua Linn

University of Illinois at Chicago - Department of Economics

Date Written: August 2009

Abstract

This paper uses a unique data set of monthly new vehicle sales by detailed model from 1978-2007, and implements a new identification strategy to estimate the effect of the price of gasoline on consumer demand for fuel economy. We control for unobserved vehicle and consumer characteristics by using within model-year changes in the price of gasoline and vehicle sales. We find a significant demand response, as nearly half of the decline in market share of U.S. manufacturers from 2002-2007 was due to the increase in the price of gasoline. On the other hand, an increase in the gasoline tax would only modestly affect average fuel economy.

Keywords: vehicle demand, fuel economy, vehicle sales, vehicle characteristics

JEL Classification: D12, C33, L5

Suggested Citation

Klier, Thomas and Linn, Joshua, The Price of Gasoline and the Demand for Fuel Economy: Evidence from Monthly New Vehicles Sales Data (August 2009). FRB of Chicago Working Paper No. 2009-15. Available at SSRN: https://ssrn.com/abstract=1514554 or http://dx.doi.org/10.2139/ssrn.1514554

Thomas Klier (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Joshua Linn

University of Illinois at Chicago - Department of Economics ( email )

725 University Hall (UH)
Chicago, IL 60607-7121
United States

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