The asymmetric response of gasoline prices to oil price shocks and policy uncertainty

Highlights: • Estimation of SVAR model of impact of oil market and economic policy shocks on gasoline prices. • Policy uncertainty shocks account for 16.1% of variation in real gasoline prices in long-run. • Economic policy shocks linked with increased (lowered) real price (consumption) of gasoline. • Uncertainty about tax legislation expiration expectations affect gasoline market. • Responses in real price (and consumption) of gasoline asymmetric to ups and downs in policy uncertainty. -- Abstract: This study shows that the effect of oil price shocks on the real price of gasoline is interrelated with economic policy uncertainty. Economic policy shocks are linked with increased real price of gasoline and reduced consumption of gasoline. There is evidence that the fluctuation of both real gasoline prices and of gasoline consumption is associated with uncertainty of tax legislation expiration expectation as well as other components of economic policy uncertainty. Positive shocks to economic policy uncertainty have relatively larger effects on gasoline prices than do negative shocks to economic policy uncertainty. Economic policy uncertainty responds asymmetrically to increases and decreases in real oil price. Shocks to economic policy uncertainty account for 16.1% of variation in real gasoline prices and for 4.9% of variation in gasoline consumption in the long-run.