Revisiting purchasing power parity in major oil-exporting countries

Abstract

Univariate unit-root tests of the purchasing power parity (PPP) are said to suffer from low power. Following the literature, we apply the sequential panel selection method combined with a Fourier function to test the PPP in six major oil exporting countries. The results support PPP in all six countries except Russia. Our results point to the importance of proper modelling of structural breaks and non-linearities in the real exchange rate series of these countries.

Keywords:

• purchasing power parity
• oil-exporting countries
• sequential panel selection method
• Fourier function

JEL classification:

• C21
• F31

Acknowledgements

Valuable comments of an anonymous reviewer are greatly appreciated. Remaining errors, however, are our own.

Notes

1. These six countries supply almost one-third of the world oil consumption.

2. For some other PPP- and exchange-rate-related studies, see Apergis (1998), Arize, Malindretos, and Christoffersen (2003), Baffoe-Bonnie (2004), Beach, Kruse, and Uri (1993), Bleaney (1992), Hojman (1989), Holmes (2002), Horne (2004), Jung (1995), Moosa (1994), Narayan (2005), Peel and Venetis (2003), Sjölander (2007), and Taylor, Peel, and Sarno (2001).

3. Enders and Lee (2012) suggest that the frequencies in Equation (2) should be obtained via the minimization of the sum of squared residuals. Their Monte Carlo experiments suggest that not more than one or two frequencies should be used because of the loss of power associated with a larger number of frequencies.