The asymmetric impact of real exchange rate on tourism demand.

• Author: Yalcin, Yeliz

1. Introduction

   Tourism is the fifth sector in the World's exports sector after petroleum, chemical, food, and automotive industries. International tourist arrivals grew by 5 percent in 2016 and more than half of it was welcomed in European countries (World Tourism Organization Annual Report, 2016). Tourism is one of the main income source of global economy. Therefore, the countries invest in this sector to get big portion of the global tourism income. Tourism has an important role in providing the capital required for the development of countries. The reason why tourism sector is considered important is its foreign currency earning feature. On the other hand, tourism income has an essential function in the balance of payments due to being foreign exchange source in tourism countries (Uguz ve Topbaj, 2011).

   Investigating the tourism economics is substantial for tourism countries. According to the researches results countries take precautions to prevent tourism demand. Undoubtedly, there are many economic or social factors that determine the demand for tourism. One of the main economic factors affecting the international tourism is exchange rate and its volatility. Although there are many studies on the impacts of exchange rate and its volatility on tourism demand, there are varying results. A large part of studies has found that the exchange rate is statistically significant for tourism demand. However, according to some empirical studies, the exchange rate has no effect on tourism demand (Vanegas and Croes, 2000; Croes and Vanegas, 2005; Quadri and Zheng, 2011). The reason for these varying results is that different countries and different time periods have been used in these studies.

   The exchange rate may affect both the choice of destination for international tourists and the length of stay and expenses (Webber, 2001; Wang, et al., 2008; Crouch, 1993). According to several findings, an increase in destination country's exchange rate causes a decrease in total number of tourists. Therefore, the exchange rate is an important indicator for international tourists as the cost of living (Martin and Witt, 1988).

   Previous studies focus on the symmetric impact of the exchange rate on the tourism demand but there is no consensus on the effect of real exchange rate on tourism demand. Asymmetric effect means that the increases and decreases in real exchange rate may not have same magnitude on the number of tourist arrivals. One of the reasons for conflict results may be that the effect of exchange rate on tourism demand is not symmetric. There is no example that have examined the asymmetry in terms of dynamic structure in the literature. To fill this gap, in this study the asymmetric VAR and nonlinear impulse-responses are used. This paper aims to investigate the asymmetric effects of the changes in real exchange rate on tourism demand by using asymmetric VAR proposed by Kilian and Vigfusson's (2011) model for 10 most popular destinations in Europe using monthly data.

   Our study has three main contributions. First, this is the first article to investigate the asymmetric effect of the currency depreciation and appreciation on tourism demand by using nonlinear impulse responses unlike the literature. Second, it captures how the negative shock and the positive shock in currency affect the tourism demand in both short and long run. Third, it is also the first study to examine how the tourism demands in top ten destinations in the Europe are affected by their currency rate.

   This paper proceeds as follows: Section 2 presents methodology. In Section 3, the data set and empirical results are discussed, and conclusions are given in Section 4.

2. Literature

   There are many studies on the impacts of the exchange rate and its volatility on tourism demand. Our literature review focuses on the studies investigate the effect of exchange rate on tourism demand. Vita and Kyaw (2013) found that the exchange rate and its volatility are important determinants on Turkey's tourist arrivals from Germany by using GARCH model for the period 1996-2009. Falk (2015) showed that the impact of the exchange rate on tourism demand with Swiss application. According to his results, after the 2008 global crisis, the appreciation of the Swiss franc led Swiss tourists to go to neighboring Austria. Demir (2004) found that the appreciation of foreign currency via the high inflation rate decreased in the number of tourist. Moreover, Akar (2012) showed that the exchange rate has significantly affected Turkish tourism demand from the Eurozone and the US. Pavlic, et.al (2015) concluded that there is a long-run relationship between tourist arrivals and real effective exchange rate for Croatia. Martins et.al (2017) investigated the world tourism demand by using 218 countries' income per capita, the nominal exchange rate and relative price for the period 1995-2012. According to their findings, arrivals in Europe are sensitive to the exchange rate and tourism demand in Africa is the most affected by macroeconomic variables. Lim and Zhu (2017) analyzed the determinants of the tourism demand growth for Singapore by using heterogeneous dynamic panel. They concluded that the Singapore tourism is not sensitive to the real exchange rate. Chi (2015) examined the impact of income and exchange rate on the US tourism for the period 1960-2011. According to findings that the real exchange rate has a significant role on tourism balance for both long and short run. Croes and Vanegas (2005) examined that the effect of price and exchange rate on the tourist arrivals to Aruba from the US, Netherlands and Venezuela by using Box-Cox transformation. They found that the effects of price and exchange rate depend on the country from which the tourists come from. Chang and...