Testing and estimating time-varying elasticities of Swiss gasoline demand

Abstract

This paper is intended to test and estimate time-varying elasticities for gasoline demand in Switzerland. For this purpose, a smooth time-varying cointegrating parameters model is investigated in order to describe smooth mutations of the Swiss gasoline demand. The methodology, based on Chebyshev polynomials, is rigorously outlined. Our empirical finding states that the time-invariance assumption does not hold for long-run price and income elasticities. Furthermore they highlight that gasoline demand passed through some periods of sensitivity and non sensitivity with respect to the price. Our empirical statements are of great importance to assess the performance of a gasoline tax as an instrument for CO2 reduction policy. Indeed, such an instrument can contribute to reduce emissions of greenhouse gases only if the demand is not fully inelastic with respect to the price. Our results suggest that such a carbon-tax would not be always suitable since the price elasticity is found not stable over time and not always significant.