Structural change in the export demand function for Indonesia: estimation, analysis and policy implications

This paper investigates the aggregate export demand behaviour in Indonesia with annual data for the period 1963–2005. Both the Pesaran bounds testing and the Johansen cointegration tests results suggest that there exists a long-run relationship between real exports, world income and the relative export prices in Indonesia. The long-run income elasticity of the demand for Indonesia's exports is significantly greater than one and the long-run relative export price elasticity of the demand for its exports is significantly lower than one. The recursive and rolling regressions and the Hansen–Johansen stability test results suggest that the export demand function for Indonesia has undergone a significant structural change since the late-1990s, which is reflected in the decrease of the income elasticity, and an increase in the relative export price elasticity, of demand for Indonesian exports. These results explain the relatively slow growth of Indonesian exports since 2000 that has slowed the country's economic recovery from the financial crises of 1997–1998