Foreign Exchange Shocks and Gasoline Consumption

Abstract

In an open economy, the foreign exchange rate (FER) influences incentives for the cross-border shopping of gasoline as well as the opportunity cost of using vehicles and the relative attractiveness of home versus foreign travel. Using monthly regional-level data of gasoline consumption in Iran, we estimate the impact of exchange rate shocks (both in level and volatility) on gasoline demand. We find that positive exchange rate shocks have a negative impact on total gasoline consumption as well as on vehicle users' demand in both short-run and long-run. Furthermore, we find that in the periods that FER is less volatile, the responsiveness of gasoline demand to a change in FER is more pronounced.

Keywords: Foreign Exchange Rate, Exchange Rate Volatility, Gasoline Consumption, Elasticity of Demand, Panel Data Estimation

JEL Classification: C23, F31, Q41, R41