Does the PPP condition hold for oil‐exporting countries? A quantile cointegration regression approach

Abstract

AbstractThis paper examines the legitimacy of the Purchasing Power Parity condition applied to the quantile process for 12 oil‐exporting countries: Algeria, Angola, Canada, Colombia, Indonesia, Iran, Kazakhstan, Kuwait, Mexico, Nigeria, Norway, and Russia. The application of quantile unit root inference methods to test the specification of the PPP condition in the quantile process yields limited support to the equilibrium condition. However, the application of quantile cointegration methods that estimate the equilibrium relationship between national prices and the nominal exchange rate is much more supportive of a generalized PPP condition that varies across countries and quantiles. Our empirical findings suggest that the distribution of the nominal exchange rate reflects a nonlinear equilibrium relationship between national prices that varies widely between the central and tail quantiles and is country‐specific.