Work detail

Stickiness of gasoline prices in the Czech Republic: Evaluation of different models of price adjustment

Author: Bc. David Svačina
Year: 2013 - summer
Leaders: doc. PhDr. Ladislav Krištoufek Ph.D.
Work type: Bachelors
Language: English
Pages: 82
Awards and prizes: B.A. with distinction from the Dean of the Faculty of Social Sciences for an extraordinarily good bachelors diploma thesis.
Abstract: There are numerous price stickiness hypotheses, explanations of why prices
do not instantly adjust to costs and demand shocks, with distinct implications
on the form of stickiness (e.g., speed of adjustment, different path
based on sign and magnitude of shocks). This paper identifies those most
widespread in the economic literature and tests their consistency with the
pattern of adjustment present in retail gasoline market, in a setting where
their thorough analysis has not yet been done. In particular, data set consists
of daily observations on three variables over the 2007–2013 period: average
retail price of gasoline in Jesenik county, Czech Republic; Brent crude oil
price in USD; and CZK/USD exchange rate. Using a transformation of the
error-correction model, with both first-differenced variables and their levels
at the last lag, only partial adjustments theory, characterized by a gradual
adjustment to costs shocks over an extended period of time due to consumers’
aversion to abrupt price changes, is found consistent with our data. This theory
explains observed lags in response of retail price to Brent and exchange
rate movements, but is neutral towards significant asymmetries in sign and
among variables. Therefore, the form of price stickiness present in our data
cannot be comprehensively explained by any of the current hypotheses.


McKinsey & Company