Are there Multiple Bubbles in the Ethanol-Gasoline Price Ratio of Brazil?

This paper presents an analysis of ethanol-gasoline price ratio in Brazil from 2000 to 2012. Since 2008 Brazilian Government has artificially frozen gasoline prices while prices of ethanol to the consumer were still liberated. Considering that annual inflation in Brazil is around 5% per year and increase in costs is transferred to ethanol prices this explain why ethanol consumption decays while gasoline consumption boosts. In Brazil, consumers are often told that ethanol is more advantageous for refueling cars when such price ration is below 0.70. In this paper, we use right-tailed ADF tests, developed recently by Phillips et al., (2013), to check for bubbles in this ratio. The results obtained suggest the existence of two bubbles: one has already collapsed and the other is still on course since 2010. Policy implications are also derived.