Determinants of Demand for Exports of Tourism: An Unobserved Component Model

Abstract

The present paper analyses the dynamic behaviours of the main determinants of tourism demand for France, Greece, Spain and Australia. In addition to the traditional variables affecting the demand for exports of tourism, namely price and foreign income, an unobserved component in the form of time varying trend enters the tourism equations to capture underlying competitiveness. The structural modelling approach within an error correction framework allows us to isolate the different sources of tourism fluctuations and to better assess the contribution of each set of variables to export flows. The findings confirm that stochastic trends are present as result of consumer tastes, technical change and other exogenous factors driving tourism flows, and that a failure to account for these trends will lead to biased estimates of long-run price and income elasticities.