Exports and Economic Growth in Indonesia : A Causality Approach based on Multi-Variate Error Correction Model <Article>

Empirical findings testing the linkage of exports and economic growth have been mixed and inconclusive. This paper attempts to re-examine the exports and economic growth nexus in Indonesia during the period of 1971 to 2008. In contrast to cross-country study, the paper investigates such relationship in a time series framework using a vector autoregressive (VAR) model by employing other related important variables. The paper also proposes a distinction to previous studies by the inclusion of variable of intermediate imports. The tests on the long-run and short-run relationship between exports and economic growth are conducted. Based on finding of causality analysis conducted in VECM system, this paper concludes that exports and economic growth exhibits bi-directional causal structure, which is ELG in long-run and GLE in short-run. Despite of some empirical evidence of ELG in precedent studies, we find a supporting evidence of ELG merely in the long-run for our dataset of Indonesia. These findings indicate the significance of both exports and economic growth to economy of Indonesia as indicated in GIRF analysis. In addition, we found no supporting evidence of positive causality from intermediate imports to GDP per capita.