Exchange Rate vs Foreign Price Passthrough Gap: Evidence From the European Gasoline Market

24 Pages Posted: 29 Jan 2019

See all articles by George Deltas

George Deltas

University of Illinois at Urbana-Champaign - Department of Economics

Michael Polemis

University of Piraeus - Department of Economics

Date Written: January 16, 2019

Abstract

We show that European retail gasoline prices respond slower to changes in the dollar exchange rate than to changes in the international spot price of wholesale gasoline, which is quoted in dollars. This differential passthrough is not specific to the Euro, and is observed both for Euro-member states and also for those using national currencies. We examine the possibility that this pattern is driven by differences in either the variability and or persistence of exchange rates changes relative to those of the dollar price of gasoline, but find minimal supporting evidence for either. Refinery supply contracts treat changes in the dollar price and the exchange rate symmetrically, and are thus also an unlikely explanation. Other possibilities, such pricing to the market or pricing based on the country of origin are precluded by the nature of the product. There is evidence, however, that exchange rate fluctuations are more strongly correlated with country-specific economic conditions, which reduces the ability of firms to pass-through price increases and lessens their incentive to pass-through price decreases. Moreover, consumers likely draw a more direct link between the crude oil and retail gasoline prices, affecting their price expectations and search intensity, and optimal passthrough.

Keywords: Price Adjustment, Inflation, Gasoline Pricing

JEL Classification: L11, L16, F31

Suggested Citation

Deltas, George and Polemis, Michael, Exchange Rate vs Foreign Price Passthrough Gap: Evidence From the European Gasoline Market (January 16, 2019). Available at SSRN: https://ssrn.com/abstract=3317179 or http://dx.doi.org/10.2139/ssrn.3317179

George Deltas (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
450 Commerce West
Champaign, IL 61820
United States
217-333-4586 (Phone)
217-244-6678 (Fax)

Michael Polemis

University of Piraeus - Department of Economics ( email )

Athens
Greece

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