The Response of Consumer Spending to Changes in Gasoline Pricest

This paper estimates how overall consumer spending responds to changes in gasoline prices. It uses the differential impact across con-sumers of the sharp drop in gasoline prices in 2014 for identifica-tion. This estimation strategy is implemented using comprehensive, high-frequency, transaction-level data for a large panel of individu-als. The average estimated marginal propensity to consume (MPC) out of unanticipated, permanent shocks to income is approximately one. This estimate accounts for the elasticity of demand for gasoline and potential slow adjustment to changes in prices. The high MPC implies that changes in gasoline prices have large aggregate effects. (JEL D12, G51, L11, L71, L81, Q35)

Automated summary

This paper estimates the impact of gasoline price changes on overall consumer spending using individual-level transaction data. The analysis finds that the average estimated marginal propensity to consume out of unanticipated, permanent income shocks is approximately one. This implies that changes in gasoline prices have significant aggregate effects.