Oil prices, exchange rate, and the price asymmetry in the Taiwanese retail gasoline market

- We model asymmetries in the adjustments of the Taiwanese retail gasoline price.
- We use asymmetric autoregressive distributed lag model as the reduced form.
- The adjustments of retail gasoline price follow a politico-economic asymmetry.
- Exchange rate shocks are the main source of price asymmetry.

This study used the asymmetric autoregressive distributed lag model to evaluate the influence of oil price and exchange rate fluctuations on retail gasoline prices in Taiwan. Unlike the numerous previous studies, we considered the unit root tests with a structural break and suggested that all price variables were stationary series. We also showed that the adjustments of retail gasoline price follow a politico-economic asymmetry. Moreover, gasoline price responses to exchange-rate shocks were slow and complex and exhibited reverse adjustments during periods of initial exchange-rate depreciation. This is potentially because domestic petroleum companies must purchase foreign currency before purchasing crude oil.