Tourism Forecasting Performance Considering the Instability of Demand Elasticities

Abstract

This study highlights that accounting for the fact that tourism elasticities do not remain stable is crucial for forecasting situations. We demonstrate that approaches with constant elasticity assumptions might lead to substantial forecasting failures, especially in periods characterized by major economic fluctuations and changes in the macroeconomic environment. Therefore, in the course of distinct business cycles, we have to take into account that different price and income effects are to be expected. The main reasons why income elasticity may vary across the business cycle include loss aversion, liquidity constraints, and precautionary savings. By analyzing smooth transition autoregressive models and time-varying parameter approaches, we demonstrate that elasticities may vary as a result of structural changes in consumer behavior and/or policy regime shifts. Income elasticities may also change in the medium term in line with the worsening of the macroeconomic environment and indicate that tourism is no longer a luxury good.