Biofuel Substitution in the U.S. Transportation Sector

We investigate biofuel substitution in the U.S. transportation sector, for the period from 1990 to 2017, using the normalized quadratic model. We relax the homoskedasticity assumption and instead assume that the covariance matrix of the errors of the flexible demand system is time-varying. We generate inference consistent with neoclassical microeconomic theory and the data generating process. Our results show that there is a small, but statistically significant substitution possibility between biofuel and natural gas, as well as between biofuel and oil, when the prices of fossil fuels change