Revisiting purchasing power parity for major oil-exporting countries using panel SURADF tests

Abstract

The panel Seemingly Unrelated Regressions Augmented Dickey–Fuller (SURADF) tests advanced by Breuer et al. (2001) are used to test the validity of Purchasing Power Parity (PPP) for eight major oil-exporting countries over the 1992:06 to 2008:02. Empirical results from several panel-based unit root tests indicate that PPP does not hold for eight major oil-exporting countries under study; however, Breuer et al.’s (2001) panel SURADF tests unequivocally indicate that PPP is valid for five countries with the exception of three countries, Kuwait, Nigeria and Saudi Arabia. These results have important policy implications for these eight oil-exporting countries under study.

Acknowledgement

The authors are grateful to Professor Myles S. Wallace who kindly provided the RATS program codes.

Notes

¹A number of studies have also provided solid empirical evidence for the nonlinear and/or asymmetric adjustment of the exchange rate. Reasons for the asymmetric adjustment are the presence of transactions costs that inhibit international goods arbitrage and official intervention in the foreign exchange market may be such that nominal exchange rate movements are asymmetric (Taylor, 2004; Taylor and Peel, 2000; Juvenal and Taylor, 2008). Kilian and Taylor (2003) also suggest that nonlinearity may arise from the heterogeneity of opinion in the foreign exchange market concerning the equilibrium level of the nominal exchange rate: as the nominal rate takes on more extreme values, a great degree of consensus develops concerning the appropriate direction of exchange rate moves and traders act accordingly.