How do Gasoline Prices Respond to a Cost Shock ?

71 Pages Posted: 19 Jan 2022

See all articles by Banque de France RPS Submitter

Banque de France RPS Submitter

affiliation not provided to SSRN

Erwan Gautier

Banque de France

Magali Marx

Banque de France

Paul VERTIER

affiliation not provided to SSRN

Date Written: January 2022

Abstract

Using several millions of daily prices collected over the period 2007-2018 in France, we investigate how gasoline retail prices respond to a common shock on marginal cost (i.e. the wholesale gasoline price quoted on the Rotterdam market). We find that the pass-through is complete: a 1% change in Rotterdam price translates to a change in retail price of 0.8%, in line with the share of the wholesale gasoline in total costs. The adjustment is gradual: the full pass through takes about 3 weeks. In a broad class of sticky price models, the ratio of the kurtosis over the frequency of price changes is shown to be a sufficient statistic for the cumulative impulse response of prices (CIRP) to a nominal shock. We provide evidence that the sufficient statistic prediction holds when we look at how gasoline prices respond to a common cost shock. Relating, at the gas station level, the CIRP to moments of the price change distribution, we find that the CIRP correlates with the ratio of kurtosis over frequency, but also with both frequency and kurtosis taken separately. The sign and the magnitude of the correlations are fully in line with theoretical predictions. We also show that other moments do not correlate with CIRP as robustly as the frequency and the kurtosis.

Keywords: Price Rigidity, Gasoline, Sufficient Statistic.

JEL Classification: E31, D43, L11

Suggested Citation

RPS Submitter, Banque de France and Gautier, Erwan and Marx, Magali and VERTIER, Paul, How do Gasoline Prices Respond to a Cost Shock ? (January 2022). Banque de France Working Paper No. 861, Available at SSRN: https://ssrn.com/abstract=4012714 or http://dx.doi.org/10.2139/ssrn.4012714

Banque de France RPS Submitter

affiliation not provided to SSRN

Erwan Gautier (Contact Author)

Banque de France ( email )

Paris
France

Magali Marx

Banque de France ( email )

Paris
France

Paul VERTIER

affiliation not provided to SSRN

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