How Do Foreign and Domestic Demand Affect Exports Performance? An Econometric Investigation of Indonesia’s Exports

Abstract

This paper explores the impacts of foreign and domestic demand on Indonesia's exports within demand and supply frameworks using aggregate data of 1971-2007. In contrast to many previous studies employing a single equation model, the paper investigates such relationship by dealing with plausible simultaneity between quantity and price within demand and supply of exports using a simultaneous equation framework, which also enables one to distinct between pull (foreign demand) and push (cost) factors of exports. To capture effects of secular and cyclical movements on exports, we dissect income variables into trend and business cycle as proxies of productive capacity and capacity utilization rate, respectively. Our results suggest that both demand-and supply-price elasticity are elastic, and secular and cyclical movements may have contrast effects on exports. The production capacity is positively attributed to exports performance, while the capacity utilization negatively affects exports, which confirms the customary version of domestic-demand pressure hypothesis. Some economic shocks and policies also play roles in determining exports performance. All estimated coefficients are statistically stable over the period under study. The findings draw policy implications namely the importance of price-based policy, provision of adequate and sound infrastructures, and further development of human capital-based industrialization.

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