Are long-run income and price elasticities of oil demand time-varying? New evidence from BRICS countries

Abstract

This study investigates and estimates long-run time-varying income and price elasticities of oil demand in Brazil, Russia, India, China, and South Africa (BRICS). A time-varying cointegration (TVC) approach allowing for the smooth changes in the parameters is employed, using quarterly data covering the period from 1990:Q1 to 2018:Q4. TVC tests confirm the variation in the long-run parameters over time for all countries by rejecting the null hypothesis of time-invariant cointegration. Moreover, results reveal that time-varying parameters of income and oil prices are inelastic for all counties' oil markets. BRICS's oil demand is significantly affected by the real economic activity, although the evidence on inelastic income implies oil as a necessary commodity. The sign of time-varying price elasticities implies oil as an ordinary good for Brazil, Russia, and China whereas an inferior good in some intervals for India and South Africa. The evidence on the insignificance of price elasticities in most of the analysis periods indicates that regulation of oil product prices cannot control domestic oil demand. Hence, one can infer that taxes imposed on petroleum product prices are not an effective policy instrument to reduce greenhouse emissions. (c) 2021 Elsevier Ltd. All rights reserved.