Traditional export demand relation and parameter instability: An empirical investigation

Abstract

Applies new tests for parameter instability in cointegrated models to evaluate the traditional export demand function. The determinants of exports considered are world real income, export price and competitors’ export price. The data for Singapore (a newly industrializing economy), from 1973‐1997, are used as a case study. Results suggest that Singapore does not satisfy the conditions of a small, price‐taking country in world trade. Irrespective of whether one normalizes export demand function by price or quantity, the state of external demand appears to be a key ingredient in Singapore’s export growth. This finding differs markedly from Riedel’s evidence. It is found that the estimation of Singapore’s export demand model requires the inclusion of some dummy variables in order to achieve not only cointegration but also long‐run parameter stability. However, once the structural breaks are accounted for, a stable relation is found, which resists a series of specification tests.