Abstract
This paper analyses the adjustment of gasoline prices in response to shocks in crude oil prices. We show that the nature of the dynamic relationship between crude oil and gasoline prices changes in February 1999. For the pre-February 1999 and the post-February 1999 sample we estimate a Threshold Vector Error-Correction Model for US gasoline prices and crude oil prices. We find evidence for a threshold effect after February 1999. The results indicate that firms adjust prices only if the deviations from the long-term equilibrium between the price of crude oil and gasoline is large enough. However, it is not the crude oil price that adjusts but the price of gasoline. Unlike the pre-February 1999 period, short-run changes in both prices tend to reinforce each other driving up the price of crude oil and gasoline.
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