Fill’er up! Anticipation and Inventory Effects on Fuel Demand

Recent years have seen increased interest in the economic literature in assessing the effects of fuel prices and taxes on fuel demand. We contribute to this literature by including anticipation and inventory effects for the first time in the analysis of motor fuel tax elasticities. Recent studies have focused on US data and gasoline consumption. By constructing a new data set we provide a complementary study for European countries and extend the analysis to diesel fuel, essential for understanding the European market. Neglecting the reaction on anticipated tax increases leads to upward biased estimates for the tax elasticities. We also reveal a difference in the ability of gasoline and diesel consumers to react to announced tax changes. By including anticipation effects we are able to narrow down the band for the tax elasticity from 0 - 0.39. Lastly we show that using quarterly data in the presence of anticipation effects may also lead to upward biased results.