Exchange Rate Volatility and Cointegration in Tourism Demand

Abstract

This study investigates the long-run demand for Australian outbound leisure tourism during the period 1983 (quarter 1) to 1997 (quarter 4) for nine major tourism destinations. The study is unique in an international context by using exchange rate volatility as an explanatory variable, while it is unique in an Australian context by using a composite substitute price variable. The estimation and hypothesis-testing processes are undertaken using both the Johansen and Engle and Granger procedures. The variance of the exchange rate was found to be a significant determinant of long-run tourism demand in 50% of estimates. Real disposable income and substitute prices were found to have inelastic long-run effects on tourism, while the long-run relative price elasticity tended to differ widely across countries. Indonesia was the only country to find that the exchange rate has a significantly different impact on tourism than relative prices.