Essays on exchange rates and electricity demand

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.