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Gasoline Prices, Vehicle Spending and National Employment: Vector Error Correction Estimates Implying a Structurally Ad

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Gasoline Prices, Vehicle Spending and National Employment: Vector Error Correction Estimates Implying a Structurally Ad

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  1. The submitted manuscript has been created by Argonne National Laboratory, a U.S. Department of Energy laboratory managed by UChicago Argonne, LLC, under Contract No. DE-AC02-06CH11357. The U.S. Government retains for itself, and others acting on its behalf, a paid-up, nonexclusive, irrevocable worldwide license in said article to reproduce, prepare derivative works, distribute copies to the public, and perform publicly and display publicly, by or on behalf of the Government Gasoline Prices, Vehicle Spending and National Employment: Vector Error Correction Estimates Implying a Structurally Adapting, Integrated System, 1949-2011 By: D. J. Santini and D. A. Poyer* Presented at: 32nd U.S. and International Associations for Energy Economics North American Conference Anchorage, Alaska: July 28-31, 2013 Sponsor: J. Ward, DOE Vehicle Technologies Program * Argonne Consultant and Morehouse College Professor

  2. Research Problem • Assess the dynamic relationship between real gasoline prices and macroeconomic activity • Assess the direct effect of real gasoline prices on real motor vehicle expenditures and employment • Assess real motor vehicle expenditures on employment • Assess structural changes in the dynamic relationship in real gasoline prices, real motor vehicle expenditures, and total employment over the post World War II period (between 1949q2 to 1987q4 and 1988q1 to 2011q3) Method(s) • Vector Error Correction econometric model, 1949-2012 • Sub-vs. full-period tests for cointegration, structural change • Consideration of both directions in bi-directional dynamic VECM • Theoretical interpretation in context of selected literature

  3. Data Used and Transformations Made for Model Variables

  4. Real Gasoline Price First Difference Changes Have Increased in Volatility Throughout the Full Sample Period, but Appear Stationary [I(0)]

  5. Employment First Differences Appear Stationary [I(0)]. Variation Dropped Sharply During the “Great Moderation” – Which Ended Badly. << Great Moderation >>

  6. Real Motor Vehicle Expenditure First Difference Changes Were Least in the Great Moderation & Appear Stationary [I(0)] for the Full Period

  7. The Levels of Real Gasoline Prices Were Dropping and Low at 1st-3rd Longest Times Between Recessions Great Moderation 1st Longest 2nd Longest 3rd Longest

  8. Within Year Timing of Reactions to Real Gas Price Impulses is Critical to Interpretation. RMVE Effects are Immediate Impulse Response Function, Full Equation

  9. Real Gasoline Price Impulse (Increase) Causes an Employment Decline With a Delay of Nearly a Year Impulse Response Function, Full Equation

  10. Employment Response to a Motor Vehicle Spending Impulse is Fairly Prompt, Mostly in < 1 Year Impulse Response Function, Full Equation

  11. If Employment Had Dropped Immediately After a Gasoline Price Impulse, It Could Have Been the Cause of “in-Year” Motor Vehicle Spending Decline (But it Didn’t) Impulse Response Function, Full Equation

  12. More Jobs Apparently Lead to More Spending on Vehicles and Fuel, Pushing Fuel Demand & Price Up Impulse Response Function, Full Equation

  13. So Far, Signs of Qrtrly “IRFs” Were the Same in Both Periods, Though Sizes Differed. However, for Real Motor Vehicle Spending on Gasoline Price, Signs Change Impulse Response Function, Full Equation

  14. The 1949-87 Period Ends With 2 Decades of Sharp Reduction in Fuel Use Per Vehicle. Reduced Demand for Gasoline Should Lower Gasoline Price (and Did). Comparison of new vehicle on-road fuel use to fleet fuel use (per vehicle), 1975-2011

  15. Conclusions • Real gasoline price, motor vehicle spending and employment are cointegratedidentically for the full sample • Error correction coefficients & adjustment parameters are collectively significantly different across subperiods • The specific sectoral shifts hypothesis advocated by J. Hamilton, which focuses on motor vehicles as the key oil price shock transmission path, is supported • Kilian’s arguments that gasoline may be as/more important than oil, and that gasoline prices are endogenous, is supported • Patterns of predicted impulse response of motor vehicle spending to a gasoline price shock are consistent with Ramey and Vine’s 2010 estimate. • Kilian’s argument that it is important to be able to produce small cars domestically to mitigate gasoline price shock impacts is supported. CAFE is credited. • Motor vehicle spending remains as important in 1988-2012 as in 1949-2011. • 1973-87 fleet efficiency gains, via CAFE regulation, endogenously pushed gasoline prices down, enabling a shift to profitable large domestic vehicles, contributing to the Great Moderation. Current high real gasoline prices, which restrict the recovery, probably result from inadequate gains in fleet fuel efficiency to date. • Dramatic variations in the domestic output of motor vehicles are a fundamental cause of Post WWII isolated recessions, the double dip recessions and Great Recession (also considers 2008 Santini and Poyer estimates).

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