The aim of this paper is to develop an econometric model of deforestation in Indonesia using time series analysis based on the annual data from 1961 to 2000. From the model, we should be able: (i) To examine the forces of agricultural and timber sectors to forest decline; (ii) To distinguish the sources, direct and underlying causes of deforestation; and (iii) To identify macro-level economic factors that give pressures on deforestation. In order to achieve these purposes, a two-stage methods for the recursive system is chosen. The robustness of the estimation is checked to ensure there are no serial correlation and heteroskedasticity in all our equations. The main findings of model estimation show that, the forest product exports and the change in cereal cropland are the main sources of deforestation in Indonesia. Therefore, the factors determining the two sources become important to be taken into consideration. However, further examination on the underlying factors of deforestation in Indonesia are adversely affected by poor estimators given by the model.