Development of a Tourism Demand Model for Indonesia

Indonesia serves as a major tourism attraction in the south Pacific primarily for its exotic locale and the existence of many islands which offer an array of activities.  In fact, tourism is a dominant industry in Indonesia which comprises approximately 70 percent of its GDP.  Given the preeminence of tourism in Indonesia, their tourism sector is vulnerable to terrorist attacks by extremist groups such as the effects of the Bali bombings in October 2002 and other terrorist attacks throughout Indonesia since these bombings.  Additionally, Indonesia experiences earthquakes and other natural disasters since Indonesia is part of the Pacific Rim as shown with the tsunami in December 2004.   Given the consequences of these terrorist attacks and natural disasters, these events potentially have consequences on the Indonesian tourism sector.  The goals in this paper are to contribute an empirical study of tourism demand dynamics for the Indonesian tourism sector using time series methods of seasonal integration and cointegration.  These methods will allow us to examine the effects of terrorism and natural disasters on the Indonesian tourism sector.