November 15^th, 2019

Structural breaks in gasoline and diesel elasticities: a dynamic analysis of the Portuguese case

Susana Silva – CEF.UP (joint with Isabel Soares and Carlos Pinho)

ABSTRACT

“Fuel consumption is strongly associated with environmental pollution. Several policies have been implemented in an attempt to mitigate these problems, among which fuel taxes are the most common. It is, therefore, crucial to know if those taxes are effective to moderate demand. In this paper we calculate price and income elasticities of gasoline and diesel demand for Portuguese consumers using a dynamic perspective. We cover the period from 1995 to 2015 as it corresponds to a critical macroeconomic period which comprehends International Monetary Fund (IMF) financial intervention in the country. Results for the whole period show that long-run price elasticities are -0.368 for diesel and -0.911 for gasoline while long-run income elasticities are 2.338 for diesel and 0.877 for gasoline. Hence, taxes are then relatively effective to moderate gasoline demand but not diesel demand. Using rolling windows, we perform a dynamic analysis and conclude that there is a certain degree of variability of those elasticities around the values estimated with the full sample. It is evident that diesel consumption responses were affected by the economic crisis. Our results show no evidence of an effect of the market liberalization.”

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