An Exploration of Australian Petrol Demand: Unobservable Habits, Irreversibility and Some Updated Estimates

Robert Breunig, Carol Gisz

    Research output: Contribution to journalArticle

    Abstract

    We explore a methodological improvement to the standard dynamic demand model for petrol - a general model which allows for slowly evolving, unobservable habits. If this habit formation model is correct, then standard estimation techniques produce inconsistent estimates. We find price elasticities of -0.13 (short-run) and -0.20 (long-run). Importantly, standard techniques are misleading about the precision of elasticity estimates and the confidence interval around the long-run price elasticity is quite wide. We test for price irreversibility and find, in contrast to the USA, almost no evidence that petrol responds differently to price increases and decreases.
    Original languageEnglish
    Pages (from-to)73-91
    JournalEconomic Record
    Volume85
    Issue number268
    DOIs
    Publication statusPublished - 2009

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