Three essays on applied econometrics : testing for purchasing power parity, modifying the ESTAR Model and factors affecting residential water demand

Abstract

This thesis consists of three main essays on applied econometrics, using time series and cross-sectional data. The first essay focuses on the issue of testing for Purchasing Power Parity (PPP). Given that the presence of transaction costs in trading implies a nonlinear adjustment process of real exchange rates towards PPP, the traditional tests for PPP using a linear framework may be inappropriate. The first essay models the dynamics of the adjustment towards PPP using a nonlinear exponential smooth transition autoregressive (ESTAR) process and tests for the validity of PPP in a nonlinear framework. Using quarterly data from 10 APEC countries, the study finds strong evidence of nonlinear stationary adjustment in real exchange rates. The primary contribution of this first essay is to provide evidence supporting PPP and resolve the inconclusiveness from previous empirical results in testing for PPP. The ESTAR model in the first essay is useful in modeling nonlinear adjustment processes, and is a growing part of the econometrics literature. However, it is limited by the assumption of symmetric adjustment in the transition to equilibrium. The second essay focuses on this issue and addresses the problem of asymmetry in the adjustment mechanism towards an equilibrium state. The contribution of this essay is fourfold. First, the study proposes a modification of the ESTAR model to account for cases where the adjustment mechanism towards equilibrium is not symmetric around an equilibrium point. Second, it develops a testing procedure to detect the presence of a nonlinear stationary process by establishing the limiting non-standard asymptotic distribution of the proposed test-statistic under the new ESTAR model, and finding critical values via Monte-Carlo simulation. This proposed test, which allows for both symmetric and asymmetric adjustment under the alternative hypothesis, is an improvement on the test based on the current ESTAR model. Third, it performs Monte Carlo simulations to access small sample performance and highlight the power gain of the new procedure over existing tests for a unit root. Fourth, the study applies the new test to 10 APEC real exchange rates and finds stronger evidence of nonlinear mean reversion supporting PPP. The third essay analyzes the determinants of residential water demand and determines the factors that affect water-saving behaviors using a household-based data set for 10 GECD countries. The study finds that water prices and unit water charges have significantly negative effects on water consumption. Having a dual flush toilet is also found to reduce water use. In determining the factors that affect water-saving behaviors, the study finds that water prices, unit water charges and attitudinal characteristics are important factors that have a positive effect on the likelihood of undertaking water-saving behaviors. The contribution of this essay is to provide insight into the determinants of residential water demand and propose policies to promote water conservation. This study suggests that price policies are important tools in promoting water conservation and these price policies would be more effective if implemented simultaneously with non-price policies such as subsidies for the adoption of dual flush toilets, public information and education campaigns. Show more