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The Role of Mediation in the Transmission of Gasoline Price Effects

Published in Economics (Volume 12, Issue 4)
Received: 19 October 2023     Accepted: 3 November 2023     Published: 11 November 2023
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Abstract

This analysis aims to investigate the direct and indirect effects of gasoline price increases on the economy. An observational study using monthly data for industrial production, employment, the consumer price index, personal consumption expenditures for services, the consumer price index for gasoline, and the effective federal funds rate for the U.S. from December 1966 through November of 2022 of indirect, direct, and causal effects. Structured equation modeling was used to examine direct and indirect effects. In contrast, impulse response functions with local projections were used to assess the causal nature of responses to a gasoline price impulse. The data is from two sources: the U. S. Bureau of Labor Statistics and FRED, the Federal Reserve Bank of St. Louis. The direct effects (standardized coefficients) of gasoline prices are 0.111 (z = 7.2) and -0046 (z = -0.2) for industrial production and employment models, respectively; the indirect effects are larger at 0.385 (z = 38.7) and 0.292 (z = 27.96). The causal effects show inflation, decreased employment, and industrial production following a gas price impulse. Following an effective federal funds rate impulse, there is no significant effect on employment or industrial production through 48 months, while the effect on the all-items consumer price index is a decrease in prices. The principal effects of an unexpected increase in gasoline prices are indirect, mediated through endogenous economic variables, while the direct effects are small. Gasoline price increases can create conditions associated with economic downturns, such as reduced employment and industrial production. The broad economic effects triggered by gasoline price increases complicate the policy considerations for those guiding the economy. They are complicated by the role of gasoline prices as an environmental policy variable.

Published in Economics (Volume 12, Issue 4)
DOI 10.11648/j.eco.20231204.11
Page(s) 112-119
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Policy Variable, Structural Equation Modeling, Mediation Model, Mediation Pathway, Indirect Effects, Direct Effects, Impulse Response Function

References
[1] 1850-2022: Oil Dependence and U.S. Foreign Policy. The Council on Foreign Relations. Available at: Timeline: Oil Dependence and U.S. Foreign Policy Oil Dependence and U.S. Foreign Policy | Council on Foreign Relations (cfr.org). Accessed on May 28, 2023.
[2] Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls. August 1971. Federal Reserve History. Available at: Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls | Federal Reserve History. Accessed on May 27, 2023.
[3] Connolly, Kevin. Legacy of 1973 Arab-Israeli war reverberates 40 years on. BBC, October 5, 2013. Available at: Legacy of 1973 Arab-Israeli war reverberates 40 years on - BBC News. It was accessed on May 28, 2023.
[4] Weekly U.S. All Grades All Formulations Retail Gasoline Prices (Dollars per Gallon). Available at: https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMM_EPM0_PTE_NUS_DPG&f=W. It was accessed on May 28, 2023.
[5] India Budget. Chapter 77. Available at: chap77 (indiabudget.gov.in). Accessed: May 29, 2023.
[6] India Petroleum & Natural Gas Statistics, 2010. Government of India Ministry of Petroleum & Natural Gas, Economic Division, New Delhi. Available at: https://mopng.gov.in/files/TableManagements/IPNG2010.pdf. Accessed May 29, 2023.
[7] Oil consumption in China from 1998 to 2021. Statista. Available at: https://www.statista.com/statistics/265235/oil-consumption-in-china-in-thousand-barrels-per-day/. Accessed on May 29, 2023.
[8] Kangni R Kpodar and Boya Liu. The Distributional Implications of the Impact of Fuel Price Increases on Inflation. Volume 2021: Issue 271. International Monetary Fund. Accessed May 23, 2023, at: https://doi.org/10.5089/9781616356156.001.
[9] Handbook of Methods, Consumer Price Index: Calculation: Estimate of price change in the Consumer Price Index: Calculation. U.S. Bureau of Labor Statistics. Available at: Calculation: Handbook of Methods: U.S. Bureau of Labor Statistics (bls.gov); accessed: October 15th, 2023.
[10] Federal Reserve Bank of San Francisco. What are the possible causes and consequences of higher oil prices on the economy? November 2007. Available at: What are the possible causes and consequences of higher oil prices on the overall economy? – Education (frbsf.org), accessed: May 22, 2023.
[11] Stata 18. StataCorp LLC. College Station, Texas, 77845.
[12] Jorda, Oscar. Estimation and Inference of Impulse Responses by Local Projections. The American Economic Review, March 2005, 95(1): 161-182. March 2005.
[13] Cain, M. Calculating power using Monte Carlo simulations, part 5: Structural equation models. The Stata Blog: Not Elsewhere Classified. 19 August 2021. StataCorp LLC.
[14] Greene, W. H. (2018). Econometric Analysis (8th ed.). Pearson.
[15] Hu, L, and P. M. Bentler (1995). Evaluating model fit. In “Structural equation modeling: Concepts, issues, and applications. Sage.
[16] Browne, M. W., and R. Cudeck. 1993. Alternative ways of assessing model fit. Reprinted in Testing Structural.
[17] Equation Models, ed. K. A. Bollen and J. S. Long, pp. 136–162. Newbury Park, CA: SAGE.
[18] Tucker L, Lewis C. A reliability coefficient for maximum likelihood factor analysis. Psychometrika. 1973; 38: 1–10.
[19] Hu, L, and P. M. Bentler (1995). Cutoff criteria for indexes in covariance structure analysis: Conventional criteria versus new alternatives. In: Structural Modeling: A Multidisciplinary Journal 6.1; 1-55. January 1999.
[20] Lutkepohl, H. New Introduction to Multiple Time Series Analysis. Springer, 2006.
Cite This Article
  • APA Style

    Cecil, W. T. (2023). The Role of Mediation in the Transmission of Gasoline Price Effects. Economics, 12(4), 112-119. https://doi.org/10.11648/j.eco.20231204.11

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    ACS Style

    Cecil, W. T. The Role of Mediation in the Transmission of Gasoline Price Effects. Economics. 2023, 12(4), 112-119. doi: 10.11648/j.eco.20231204.11

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    AMA Style

    Cecil WT. The Role of Mediation in the Transmission of Gasoline Price Effects. Economics. 2023;12(4):112-119. doi: 10.11648/j.eco.20231204.11

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  • @article{10.11648/j.eco.20231204.11,
      author = {William Thomas Cecil},
      title = {The Role of Mediation in the Transmission of Gasoline Price Effects},
      journal = {Economics},
      volume = {12},
      number = {4},
      pages = {112-119},
      doi = {10.11648/j.eco.20231204.11},
      url = {https://doi.org/10.11648/j.eco.20231204.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.eco.20231204.11},
      abstract = {This analysis aims to investigate the direct and indirect effects of gasoline price increases on the economy. An observational study using monthly data for industrial production, employment, the consumer price index, personal consumption expenditures for services, the consumer price index for gasoline, and the effective federal funds rate for the U.S. from December 1966 through November of 2022 of indirect, direct, and causal effects. Structured equation modeling was used to examine direct and indirect effects. In contrast, impulse response functions with local projections were used to assess the causal nature of responses to a gasoline price impulse. The data is from two sources: the U. S. Bureau of Labor Statistics and FRED, the Federal Reserve Bank of St. Louis. The direct effects (standardized coefficients) of gasoline prices are 0.111 (z = 7.2) and -0046 (z = -0.2) for industrial production and employment models, respectively; the indirect effects are larger at 0.385 (z = 38.7) and 0.292 (z = 27.96). The causal effects show inflation, decreased employment, and industrial production following a gas price impulse. Following an effective federal funds rate impulse, there is no significant effect on employment or industrial production through 48 months, while the effect on the all-items consumer price index is a decrease in prices. The principal effects of an unexpected increase in gasoline prices are indirect, mediated through endogenous economic variables, while the direct effects are small. Gasoline price increases can create conditions associated with economic downturns, such as reduced employment and industrial production. The broad economic effects triggered by gasoline price increases complicate the policy considerations for those guiding the economy. They are complicated by the role of gasoline prices as an environmental policy variable.
    },
     year = {2023}
    }
    

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    AU  - William Thomas Cecil
    Y1  - 2023/11/11
    PY  - 2023
    N1  - https://doi.org/10.11648/j.eco.20231204.11
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    PB  - Science Publishing Group
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    AB  - This analysis aims to investigate the direct and indirect effects of gasoline price increases on the economy. An observational study using monthly data for industrial production, employment, the consumer price index, personal consumption expenditures for services, the consumer price index for gasoline, and the effective federal funds rate for the U.S. from December 1966 through November of 2022 of indirect, direct, and causal effects. Structured equation modeling was used to examine direct and indirect effects. In contrast, impulse response functions with local projections were used to assess the causal nature of responses to a gasoline price impulse. The data is from two sources: the U. S. Bureau of Labor Statistics and FRED, the Federal Reserve Bank of St. Louis. The direct effects (standardized coefficients) of gasoline prices are 0.111 (z = 7.2) and -0046 (z = -0.2) for industrial production and employment models, respectively; the indirect effects are larger at 0.385 (z = 38.7) and 0.292 (z = 27.96). The causal effects show inflation, decreased employment, and industrial production following a gas price impulse. Following an effective federal funds rate impulse, there is no significant effect on employment or industrial production through 48 months, while the effect on the all-items consumer price index is a decrease in prices. The principal effects of an unexpected increase in gasoline prices are indirect, mediated through endogenous economic variables, while the direct effects are small. Gasoline price increases can create conditions associated with economic downturns, such as reduced employment and industrial production. The broad economic effects triggered by gasoline price increases complicate the policy considerations for those guiding the economy. They are complicated by the role of gasoline prices as an environmental policy variable.
    
    VL  - 12
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