Dynamics of U.S. State Cigarette Consumption: Evidence from Panel Error Correction Modeling

Abstract

This study uses state-level data for nearly four decades to study the dynamic demand for cigarettes, focusing especially on the long-run equilibrium relationship between cigarette consumption and its determinants as well as the short-run and long-run causal dynamics. We find the presence of cointegration with the long-run equilibrium, indicating the price elasticity of cigarette demand to be negative and inelastic, the income elasticity is positive and the border smuggling effects are significant, with substantial variations across individual states. Of the various smoking control policies considered, questions remain as to the effectiveness of aggregate anti-smoking initiatives that treat all states alike. Furthermore, the causal dynamics reveal bi-directional causality between cigarette consumption and its determinants. Some policy implications are discussed.