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The Price of Gasoline and New Vehicle Fuel Economy: Evidence from Monthly Sales Data
Thomas Klier, Joshua Linn
American Economic Journal: Economic Policy. Aug 2010, Vol. 2, No. 3: Pages 134-153

The Price of Gasoline and New Vehicle Fuel Economy: Evidence from Monthly Sales Data

Thomas Klier, 1

1Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, IL 60604.

Joshua Linn2

2Massachusetts Institute of Technology, MIT Energy Initiative, E19-314H, 77 Massachusetts Ave, Cambridge, MA 02139.

Abstract

This paper uses a unique dataset of monthly new vehicle sales by detailed model from 1978 to 2007, and implements a new identification strategy to estimate the effect of the price of gasoline on individual vehicle model sales. We control for unobserved vehicle and consumer characteristics by using within model year changes in the price of gasoline and sales. We find a significant sales response, suggesting that the gasoline price increase from 2002 to 2007 explains nearly half of the decline in market share of US manufacturers. On the other hand, an increase in the gasoline tax would only modestly raise average fuel economy. (JEL H25, L11, L62, L71)