TIME-VARYING LONG-RUN ELASTICITIES OF OIL DEMAND: EVIDENCE FROM AN EMERGING MARKET

This study estimates the elasticities of the time-varying oil demand function in Turkey. To this end, a time-varying cointegration (TVC) method is utilized that allows for smooth changes in parameters. The TVC findings indicate the variation in long-run parameters over time by rejecting the null hypothesis of time-invariant cointegration. Oil can be considered a necessary good based on inelastic income evidence because time-varying income parameters are statistically significant but inelastic for the majority of the estimation period. However, oil demand in Turkey appears to be unaffected by price fluctuations and is more responsive to changes in real economic activity. As a result, our findings suggest that regulating the price of oil products through the imposition of a consumption tax is not a viable way to reduce oil demand. Our findings emphasize the importance of developing policies that promote indigenous production and increase energy production from renewable sources.