Essays on exchange rates and electricity demand

Abstract

This thesis examines two important issues in economic development: exchange rates and electricity demand and addresses methodological issues of using time series and panel data analysis to investigate important policy issues. In Chapter 2, I examine the impacts of a currency board on the adjustment of a small open economy to external shocks of imported intermediate input prices. The results of this examination add to the existing evidence of the relative merits of a currency board versus a flexible exchange rate. My main finding is that when nominal rigidity exists and the economy is faced with a negative shock, output drops more under a currency board than under flexible exchange rates. Moreover, the difference in output drop declines as the share of tradables in total consumption decreases. This is contrary to the popular view that the more open an economy, the less costly it is to fix the exchange rate. My empirical analysis, based on data from Hong Kong and Singapore, supports my theoretical prediction that with a negative shock output drops more under a currency board than under flexible exchange rates, since considerable nominal rigidity does exist in reality. This is the first such attempt to examine empirically how small economies react to external shocks under different exchange-rate regimes. In Chapter 3, I examine the response of real exchange rates to trade liberalization. Although theory suggests that a country's real exchange rate should depreciate after a trade liberalization, there is relatively little empirical evidence for this prediction. Existing studies either test the response indirectly or use imprecise and unreliable measures of trade openness.

(cont.) By carefully documenting trade liberalization experiences in 45 countries, I obtain the following major findings. The real exchange rates depreciate by 10.5 to 13.6 percent after a country opens to trade. As trade liberalization proceeds during a liberalization episode, real exchange rates depreciate by 4.8 to 5.5 percent annually. There appears to be a significant difference between early trade liberalization episodes and the last such episode for countries that underwent multiple episodes of trade liberalization. During early episodes, the real exchange rates appreciate by 9.5 to 12.1 percent. In contrast, during the last (or only) trade liberalization episode of a country, the real exchange rates depreciate by 0.6 to 3.4 percent at the beginning of the reform. Finally, in the process of trade liberalization and after a country opens to trade, its real exchange rate becomes more sensitive to capital inflows. A one percentage point increase in the net capital inflows will cause the real exchange rate to appreciate by 0.8 percent more during liberalization and 0.3 to 0.6 percent more after the opening than prior to the reform. In Chapter 4, I analyze the residential electricity demand in urban China, which has never been examined rigorously before. In a situation of serious data scarcity, I painstakingly collected data from various sources and made appropriate adjustments to ensure consistency.

(cont.) After conducting careful tests to determine the appropriate econometric specification, ...