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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

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
2

Data Used and Transformations Made for Model
Variables
Mnemonic Definition Source
Unit of
Measure a
LNS12000000Q
Seasonally Adjusted
Employment Level
Bureau of Labor
Statistics
Thousands
RMVE= Real motor vehicle & parts
(DMOTRC1/DMOTRG3)100 expenditures
Bureau of Economic
Analysis
Billions 2005 $ realgasprice=
(DGOERG3/DPCERG3)
Real price of gasoline & other Bureau of Economic
Analysis energy goods b a Values are quarterly.
b Ratio of the price indices for real gasoline and other goods, and personal consumption expenditures.
Index
(2005=1)
4

Real Gasoline Price First Difference Changes Have
Increased in Volatility Throughout the Full Sample
Period, but Appear Stationary [ I( 0 )]
8

0
<< Great Moderation >>
9

Real Motor Vehicle Expenditure First Difference
Changes Were Least in the Great Moderation &
Appear Stationary [
0
for the Full Period
10

st
rd
Great Moderation
2 nd
Longest
1 st Longest
3 rd
Longest
11

Within Year Timing of Reactions to Real Gas Price
Impulses is Critical to Interpretation. RMVE Effects are Immediate
Impulse Response Function, Full Equation
15

Real Gasoline Price Impulse (Increase) Causes an
Employment Decline With a Delay of Nearly a Year
Impulse Response Function, Full Equation
16

Employment Response to a Motor Vehicle Spending
Impulse is Fairly Prompt, Mostly in < 1 Year
Impulse Response Function, Full Equation
17

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
18

More Jobs Apparently Lead to More Spending on
Vehicles and Fuel, Pushing Fuel Demand & Price Up
Impulse Response Function, Full Equation
19

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
20

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
21

 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).
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