A cointegration analysis of gasoline demand in the United States

Abstract

Time-series estimation of gasoline demand elasticities often does not take into account the possibility of non-stationarity in the underlying data, which may render the parameter estimates spurious. Studies have shown that the time trending variables used to explain gasoline demand could be difference stationary and therefore may require cointegration analysis to assess the relationship among the trending variables. In this work we use the cointegration technique to derive long run and short run demand elasticities of non-commercial gasoline consumption using time-series data for the USA from 1949 to 2004. We also attempt to incorporate the presence of a structural break in the data generation process of the time trending variables. Our results show that the consumption of gasoline and lifetime income have a long term stable relationship after the second oil shock of 1978. Prior to the first oil shock of 1973, no such long run relationship could be established through cointegration.