On the relation between exchange rates and tourism demand: A nonlinear and asymmetric analysis

Abstract

Abstract Previous studies of demand for tourism assumed that the effect of exchange rate fluctuations on the demand for tourism were symmetric for appreciations and depreciations, in both sign and size. In this paper we separate appreciations from depreciations and find that the assumption is not justified. Thus, this paper examines the extent to which exchange rate changes have an asymmetric effect on tourism demand in ten European countries by using hidden cointegration analysis within a likelihood-based panel framework. The findings indicate that there is a long-run relationship between tourism demand and exchange rate fluctuations which give support for the view that tourism demand have responded asymmetrically to the exchange rate changes. The economic implication of our results is that depreciations and appreciations affect tourism demand differently both in sign and size. It is worth mentioning that the methodological framework utilized in this paper can be a useful tool for designing and predicting the behavior of exchange rates.