The Response of Consumer Spending to Changes in Gasoline Prices

60 Pages Posted: 27 Dec 2016

See all articles by Michael Gelman

Michael Gelman

Claremont McKenna College; University of Michigan at Ann Arbor - Survey Research Center

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Shachar Kariv

University of California, Berkeley - Department of Economics

Dmitri Koustas

University of California, Berkeley - Department of Economics

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Dan Silverman

Arizona State University (ASU) - W.P. Carey School of Business

Steven Tadelis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: December 2016

Abstract

This paper estimates how overall consumer spending responds to changes in gasoline prices. It uses the differential impact across consumers of the sudden, large drop in gasoline prices in 2014 for identification. This estimation strategy is implemented using comprehensive, high-frequency transaction-level data for a large panel of individuals. The estimated marginal propensity to consume (MPC) out of unanticipated, permanent shocks to income is approximately one. This estimate takes into account the elasticity of demand for gasoline and potential slow adjustment to changes in prices. The high MPC implies that changes in gasoline prices have large aggregate effects.

Suggested Citation

Gelman, Michael and Gorodnichenko, Yuriy and Kariv, Shachar and Koustas, Dmitri and Shapiro, Matthew D. and Silverman, Dan and Tadelis, Steven, The Response of Consumer Spending to Changes in Gasoline Prices (December 2016). NBER Working Paper No. w22969. Available at SSRN: https://ssrn.com/abstract=2890101

Michael Gelman (Contact Author)

Claremont McKenna College ( email )

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University of Michigan at Ann Arbor - Survey Research Center ( email )

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Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Shachar Kariv

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Dmitri Koustas

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Matthew D. Shapiro

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

and Survey Research Center
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National Bureau of Economic Research (NBER) ( email )

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313-764-2769 (Fax)

Dan Silverman

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Steven Tadelis

University of California, Berkeley - Haas School of Business ( email )

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Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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