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 ConferenceAnchorage, Alaska: July 28-31, 2013

Sponsor: J. Ward, DOE Vehicle Technologies Program* Argonne Consultant and Morehouse College Professor

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

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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

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Data Used and Transformations Made for Model Variables

Mnemonic Definition SourceUnit of

Measurea

LNS12000000QSeasonally Adjusted Employment Level

Bureau of Labor Statistics

Thousands

RMVE=(DMOTRC1/DMOTRG3)100

Real motor vehicle & parts expenditures

Bureau of Economic Analysis

Billions 2005 $

realgasprice=(DGOERG3/DPCERG3)

Real price of gasoline & other

energy goodsb

Bureau of Economic Analysis

Index (2005=1)

a Values are quarterly.b Ratio of the price indices for real gasoline and other goods, and personal consumption expenditures.

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Real Gasoline Price First Difference Changes Have Increased in Volatility

Throughout the Full Sample Period, but Appear Stationary [I(0)]

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Employment First Differences Appear Stationary [I(0)]. Variation Dropped

Sharply During the “Great Moderation” – Which Ended Badly.<< Great Moderation >>

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Real Motor Vehicle Expenditure First Difference Changes Were Least in the Great Moderation & Appear Stationary

[I(0)] for the Full Period

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The Levels of Real Gasoline Prices Were Dropping and Low at 1st-3rd Longest Times

Between Recessions

1st Longest

3rd

Longest

2nd

Longest

Great Moderation

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Within Year Timing of Reactions to Real Gas Price Impulses is Critical to Interpretation. RMVE Effects are Immediate

Impulse Response Function, Full Equation

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Real Gasoline Price Impulse (Increase) Causes an Employment Decline With a Delay of Nearly a Year

Impulse Response Function, Full Equation

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Employment Response to a Motor Vehicle Spending Impulse is Fairly Prompt, Mostly

in < 1 Year

Impulse Response Function, Full Equation

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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

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More Jobs Apparently Lead to More Spending on Vehicles and Fuel, Pushing Fuel Demand & Price Up

Impulse Response Function, Full Equation

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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

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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

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Conclusions Real gasoline price, motor vehicle spending and employment are cointegrated

identically 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).