Aspects of balance of payments modelling in a developing economy : a case study of Indonesia

This study examines the elasticities, absorption, monetary, capital market and the structural approaches to the balance of payments in the context of Indonesia's international transactions for 1960-1988. The main findings are : The necessary condition of the Marshall-Lerner is not satisfied in the SR , it is fulfilled in the LR but only just ! However, the sufficient condition shows that in the SR, the trade balance ameliorates but deteriorates in the LR, a reverse "J-curve" effect! The "pass-through" equation reveals that exchange rate, import price, money supply and lagged domestic price are significant in explaining domestic price responses. The significance of the pass through coefficient reveals that it is difficult to sustain price levels due to devaluation; inflationary effects counteract the price advantages following devaluations. The absorption model shows that the magnitude of the coefficient of MPA is relatively high indicating that the economy has been absorbing more than it produces. The reserve model reveals that the assumption of homogeneity in prices cannot be rejected; the restricted specifications are superior to the unrestricted ones. The major prediction of the monetary theory that the offset coefficient should be negative appears to be verified in most cases…