This paper applies a pairwise approach to investigate the validity of the law of one price in the crude oil markets. Price differentials appear smaller between crude oil pairs with similar physical/chemical characteristics and also for pairs within OPEC.

The cross-sectionally augmented IPS (CIPS) test of Pesaran (2007) is extended for a three-dimensional (3D) panel. This 3D-CIPS test is correctly sized. However, a bootstrapped IPS test has better power performance than the 3D-CIPS, except for high levels of cross-sectional dependency.

We introduce non-linear fiscal reaction functions with endogenously estimated state-varying thresholds to capture the behaviour of fiscal policy authorities during “good” and “bad” times. These thresholds vary with the level of debt, the economic cycle and a financial pressure index.