The Rockets and Feathers Phenomenon in China: Evidence from a Gasoline Price Pass-Through Analysis

Abstract

Based on the long-run equilibrium relationships between international crude oil prices and domestic gasoline prices, we employ an asymmetric error correction model (ECM) with the seemingly unrelated regression (SUR) method, to study the price pass-through of the wholesale gasoline in 20 provincial-level administrative divisions in China during the period between 2009 and 2013. We estimate the speeds, sizes, region differences and asymmetries in the gasoline price adjustment processes. We find that 16 provinces exhibit significant "rockets and feathers" phenomena. In Jiangxi province, where the highest level of asymmetry exists, wholesale prices are on average 13.26 yuan higher in the same week after a one-dollar increase in the price of crude oil, but are still 2.49 yuan higher after a one-dollar decrease. We discuss the identification conditions of our models, the possible theories behind the asymmetries, and their policy implications.